
Book Jj^_ 



Copyright W... 



COPYRIGHT DEPOSIT. 



A NEGLECTED 
POINT 

IN CONNECTION WITH CRISES 



By 

N. JOHANNSEN 



NEW YORK 
THE BANKERS PUBLISHING CO. 

1908 



juBftABY of GQNuRfcSS.' 
iwu oooies rieceiv*;! 

SEP 1 W08 



GLASS ^A- XXc. No. 
JOHY U. 



Copyright. 1908 
By N. JOHANNSEN 







# 



INTRODUCTORY 



The black central field and the 
red ring, together, represent the 
country's money supply; consist- 
ing partly of coin, or certifi- 
cates backed by coin; partly of 
bank notes; and partly of bank 
money (deposits in commercial 
banks, "money in bank"). 

The black central field repre- 
sents such of the country's cash 
funds as are available for in- 
vestment, or for lending pur- 
poses; the red ring, all cash 
funds not so available and all 
other money in the country. The 
lines between the centre and the 
ring show the movements of 
money in connection with the 
processes of saving and invest- 
ing; the wider the lines, the 
greater the values they repre- 
sent. 

The Money Market (central 
field) is fed principally by the 
red lines, savings, which carry 
funds from the ring to the 
centre; it is drained by the 
black lines, which carry the 
money back from the centre to 
the ring. Most of the black 
lines, but not all of them, rep- 
resent investments. 

The red ring shows, by means 
of the large arrows, the circu- 
lation of money in the regular 
course of business. It is divided 
into two sections, pink and 
carmine. The latter represents 
the money that happens to be, 
at a given moment, in the 
people's possession in the shape 
of income: money available for 
expenditures and for buying 
commodities (Purchase Money). 
The pink section represents 
money neither available for 



Showing the Cin 

G ) as aft 
-(§) 8 AY/I Ni © s sm 




For Explan. 



E 



f CHART 

ation of Money 
ted by o 

!fty£S?1fflill|f > §» ( 



@a (C 





INTRODUCTORY 

CONTINUED 

spending nor for investment, 
being needed by business men for 
carrying on their regular busi- 
ness. 

Whenever "Purchase Money" 
(Income) is expended in the 
purchase of commodities, say of 
a hat costing $2.50, it leaves the 
carmine field and crosses the 
"Purchase Line" (which see), 
becoming Business Money in 
the hands of the hatter. When 
he replenishes his stock and new 
goods are being made, that 
amount will be split up as fol- 
lows: the retailer retains $1.00 
as his profit; the wholesaler 
25c. ; the hatmaker 65c. ; the 
manufacturers of the raw 
material 50c. ; the transporters 
ioc. Thus the Purchase Money, 
after passing the Purchase Line, 
will, in its course around the 
pink circle, reach in turn the 
retail dealer (lower left), the 
wholesale dealer (upper left), 
the manufacturer (upper right), 
the manufacturer of material 
(lower right) — each of these 
parties retaining a portion as 
income (wages or profits) 
until the whole of the money in 
its course around the circle has 
passed the Income Line (which 
see) and becomes income again. 

The central field is small, 
compared with the pink field; 
so are the funds of the Money 
Market, compared with those 
employed by business men. It 
should be well understood that 
the former are available for in- 
vestment, but the latter are not; 
they have already found invest- 
ment — in the shape # of liquid 
capital needed in business. 



see Page 34. 



DIAGRAMS 



SHOWING HOW CERTAIN LINES OF THE CHART 

ARE AFFECTED BY A CHANGE OF CONDITIONS. 

FIGURES CONJECTURAL. 




DIAGRAM 1 shows Line n, with its branches, the same as in 
the Chart; also Line 17. It is intended to represent the conditions 
in the United States at a time of great prosperity; for example, such 
as prevailed in 1900. Practically all of the Net Savings (No. 11), 
put down at three billions per annum, became useful Capitalistic 
Savings (No. 11 B), finding employment in Capitalistic Investments 
(not shown in the diagram). Only a nominal share of the Net 
Savings became Impair Savings (No. 11 C) ; these effected their 
return flow from the Money Market (the black field) in the shape 
of Impair Investments, represented by Line 17. 

DIAGRAM 2 is intended to represent the same lines as diagram 
I, as they would appear when affected by a year of depression, such 
as prevailed in 1894. The Net Savings (No. 11) have fallen from three 
billions to two billions. And of this amount only one billion (No. 
11 B) finds useful employment in Capitalistic Investments, while the 
other billion represents Impair Savings (No. 11 C), leading to Impair 
Investments as represented by Line 17. 

DIAGRAM 3 is intended to represent these lines in an unpro- 
gressive country, like China. The aggregate of Net Savings (No. 11) 
is but small, and consists almost entirely of Impair Savings (No. 
11 C) ; so the line of Impair Investments, No. 17, is practically equiv- 
alent to the line of Net Savings, No. it. The useful savings, No. 
11 C, put down as "nominal," are insignificant, our premise being 
that the country is unprogressive, and no increase of wealth taking 
place. 



SYNOPSIS. 

"Lack of demand" is the characteristic feature of 
crises and depressions, especially of the latter; lack of 
demand for working forces 6 as well as for commodities. 

The cause of this lack of demand, at times of depres- 
sion, is practically unknown. Some economists have 
tried to connect it with the saving process 1 . If a man 
earns $1,000 and spends only $900, he will create a short- 
age of demand to the extent of $100, and unless this 
shortage were counteracted, we would here have a clear 
case showing how the "lack of demand" is introduced 
into our economic system as a positive and definite 
element. 

Our economists hold that such counteraction takes 
place whenever the savings funds 1 come to be invested. 
In the course of the investment they are finally expended 
for goods or commodities. Thus, if the said amount of 
$100 be applied towards building a house and be paid out 
in the shape of wages to the builders, the latter will ex- 
pend the money in buying the commodities they need. 
This constitutes a demand to the extent of $100 ; not only 
for goods, but also for such working forces 6 as produce 
the goods, or, as it were, reproduce them. This demand 
fully compensates for the original shortage of demand 
caused by the saving activity — a process which can easily 
be traced. 

But will such compensation also take place where 
the savings funds find no opportunities to be invested in 
enterprise and new constructions? 3 At times of depres- 
sion such opportunities become scarce and the funds have 
to follow a different mode of investment which is hard to 
trace. Our economists maintain, that even then a com- 



ii Synopsis. 

pensation is effected. They point to a very peculiar 
phenomenon which can always be observed at such times, 
namely : the savings funds which constantly flow into the 
money market do not accumulate there (except to a small 
extent) but find their way back into the channels of pro- 
duction and trade. They cannot get back into these chan- 
nels without buying goods or commodities in some shape 
or other. If they do, they create a demand, not only for 
goods, but also for working forces. The demand thus 
created by the expenditure of the said $100 will be fully 
as large as the original shortage of demand ($100) caused 
by the saving activity. 

From these facts, undeniable as they are, our econ- 
omists have drawn the conclusion that the saving activity 
cannot result in a real shortage of the demand, provided 
the savings funds be promptly invested. This conclusion 
has been universally accepted as correct and has prac- 
tically become an axiom in modern economics. Still, it is 
not reliable. 

The conclusion loses sight of a certain eventuality. In 
ordinary business each participant (working-man, trader, 
capitalist, &c.) furnishes both supply and demand. If A 
supplies goods or services to the community worth $100 
(or draws income from the community in any shape), he 
subsequently will buy a hundred dollars' worth of goods 
from, the community ; either he or his family. Just so 
with B. Ordinarily, therefore, two sets of working forces, 
A and B, will furnish two supplies and two demands. At 
times of depression, however, we often find only one 
supply and one demand between the two sets of working 
forces, some of the individuals producing without con- 
suming — others consuming without producing, their ser- 
vices being left uncalled for. This leaves part of the 
working forces without employment and will disturb the 



Synopsis. iii 

equilibrium between the demand for working forces and 
the supply thereof. 

Such unemployment always occurs whenever savings 
funds are invested in that peculiar manner which char- 
acterizes times of depression; the saving process then as- 
suming its "Impairing Form." Exactly how the invest- 
ment takes place at such times has never been explained 
by our economists, the subject having escaped their at- 
tention. It will be revealed in this present treatise. And 
it will be shown that, though the savings will finally be 
turned into goods and commodities, and though this will 
give employment to working forces, yet unemployment is 
bound to intervene before this result is reached; unem- 
ployment as well as "lack of demand," both due to the 
saving process. 

Once we comprehend the dual nature of the saving 
process — stimulating business at one time and depressing 
it at another — we shall not only get a clearer view of the 
causes underlying depressions but will also know in which 
direction to look for the remedy. 



CONTENTS. 

CHAPTER I. 

THE APPARENT CAUSE OF CRISES AND 
DEPRESSIONS 1 

CHAPTER II. 

HOW ARE SAVINGS INVESTED AT TIMES OF 

DEPRESSION? 11 

Do they accumulate in the Money Market"/. . . 14 
Do they go into Temporary Investments?. ... 16 

Do they become Liquid Capital? 18 

Are they absorbed when used for paying 

debts? 20 

Are they used to relieve over-strained 

credits ? 22 

Do they serve to increase the expenditures for 

commodities ? 26 

Are they used for the creation of "unpro- 
ductive capital " ? 27 

Do they find investment in the purchase of 

mortgages, securities, etc. ? 28 

Do they go abroad ? 28 

Do they fall off in the same proportion as the 

opportunities for new constructions fall off? 30 
Recapitulation 32 

CHAPTER III. 

THE INVESTMENT OF SAVINGS AT TIMES OF 

DEPRESSION 34 

Explanation of the chart 34 

Impair Investments 38 



ri Contents. 

Basic Calculation 40 

Impoverishment of the masses 42 

How is the impoverishment brought about ? . . 43 

Multiplying Principle 43 

The impoverishment of "others" the basis for 

the investment of Excess Savings 47 

Recapitulation 52 

CHAPTER IF. 

VARIOUS DEPRESSION THEORIES 55 

Lack-of-funds theory 55 

Excessive profits 66 

Disproportions between economic factors.... 69 

Summary 76 

CHAPTER V. 
THE "NEGLECTED POINT" AS THE TRUE 
CAUSE OF DEPRESSIONS 77 

CHAPTER VI. 
PROS AND CONS 89 

Investment demand not necessarily a demand 

for working forces 89 

The three phases of the saving process 92 

Tables showing Debit and Credit of Supply 

and Demand 96 

Are the nations of greatest saving propensity 

the wealthiest? 100 

Interest as indicative of a demand for cash 

capital 106 

Interest as indicative of a need of money 107 

Why the demand for working forces should be 

measured in terms of money 108 

The purchase of commodities as rewarding 

past labor 109 



Contents. 



VII 



Squandering HO 

Other forms of investment, besides the Cap- 
italistic and the Impairing 113 

The extent of the country's saving power. . . . 114 
A positive proof of the existence of Impair 

. Savings 118 

Recapitulation 123 

CHAPTER VII. 
VARIOUS FACTORS AFFECTING PROSPERITY 126 

The money supply 126 

Industry 130 

Enterprise 131 

Foreign trade 133 

Minor factors 137 

CHAPTER VIII. 
RECENT UPS AND DOWNS OF PROSPERITY 

IN THE UNITED STATES 139 

Causes of the Panic of 1893 140 

Leading features of the Panic of 1893 and of 

the subsequent depression 141 

The Return of Prosperity 145 

Complications due to Foreign Trade 147 

Relative Scarcity of Currency 150 

Unhealthy Basis of the Bank Money 154 

Excessive Volume of Bank Money, yet a 

Dearth of Cash Capital 156 

Causes of the Dearth of Cash Capital 158 

Inflation and Depreciation 160 

Inflation the moving factor 161 

The Panic of 1907 163 

The Subsequent Depression 165 

What of the Future ? 168 

In Conclusion 171 



viii Contents. 

CHAPTER IX. 

SUMMARY OF THE FOREGOING 175 

A brief review 175 

The three degrees of business activity 180 

Economic fallacies 184 

Once more, the "Neglected Point" 190 

EXPLANATORY NOTES 192 



A NEGLECTED POINT 

IN CONNECTION WITH CRISES. 



CHAPTER I. 

THE APPARENT CAUSE OF CRISES 
AND DEPRESSIONS. 

(The small figures throughout the book refer to Explanatory Notes 
at the end of the volume.) 

MODERN economists make a sharp distinction be- 
tween crises and depressions, the one designating 
the shock which marks the end of a reign of 
prosperity, the other the period of stagnation in trade 
which follows. In common usage, however, when we 
speak of a crisis, such a distinction is not made, and a 
theory purporting to throw new light on the subject is 
expected not to confine itself to the initial stage, the 
crisis proper, but to deal largely with the subsequent 
depression of business — a usage which has been adhered 
to in selecting the title of this book. In fact, the "ne- 
glected point" which I am going to reveal is primarily a 
factor connected with depressions. At times, however, it 
has also been the governing factor in developing a crisis. 
Despite the common usage of treating crises and 
depressions as practically one and the same thing, we 
are justified in distinguishing between the two, for there 
is a radical difference not only in their outward manifes- 
tations but often in their origin. Our economists have 
hardly gone far enough in this respect, They have 



The Apparent Cause 



dwelt much more upon the difference in the manifesta- 
tions than upon the difference in the underlying causes. 
Indeed, the more important crisis theories now extant 
assume practically one and the same fundamental cause 
as governing both crises and depressions. Let us see 
if this assumption can stand scrutiny, and let us inquire 
into some of these theories in order to ascertain how far 
the apparent cause of the one will answer to explain the 
phenomena connected with the other. 

The theory most widely accepted holds that a crisis 
must be attributed to overtrading, too much specula- 
tion, extravagance, etc., these various causes absorbing 
too much of the country's cash capital; and that a period 
of restriction in enterprise and of retrenchment in ex- 
penditures must follow to allow of building up fresh 
funds of liquid capital. This theory, no doubt, is capti- 
vating on account of its simplicity and apparent common 
sense. It seems plausible that inasmuch as the crisis is 
marked by a decided money famine, and inasmuch as 
before the setting in of the crisis there must have been 
an exhaustion of the country's cash capital, a period of 
repose and of commercial depression becomes necessary, 
to permit of recuperation. So it is the dearth of cash 
funds, occasioned by overtrading, etc., which really would 
stand as the cause of both — of the crisis as well as of the 
depression. But do we not here encounter an absurdity? 
Can the dearth of cash funds be the cause of the depres- 
sion where as a matter of fact there is no such dearth 
while the depression exists and where, on the contrary, 
we witness an excess of idle cash funds? To get around 
this difficulty the theory had to be enlarged by taking in 
a new element — the loss of confidence incident to the 
panic and continuing during the subsequent depression, 
in consequence of which merchants and manufacturers 
do not carry on trade and enterprise to the same extent 



of Crises and Depressions. 



as formerly. This new element, however, does not cover 
the point either, for confidence is really not lacking and 
would manifest itself at once wherever an opportunity 
for a profitable undertaking would offer itself. The fact 
is, such opportunities are scarce, owing to the prostrate 
state of trade and the lack of demand; and this lack of 
demand, which forms the gist of the depression, is neither 
explained by the loss of confidence nor by the scarcity of 
cash funds which originally engendered the crisis. The 
"lack-of -funds" theory, therefore, though fully explain- 
ing the setting in of a crisis, and thus accounting for the 
initial stage of a depression, will not explain why the 
depression should continue for years in succession. A 
depression may be started by a lack of funds and a loss 
of confidence; but if it were dependent only upon these 
two factors, it ought to disappear as soon as these two 
factors disappear. When the scarcity of cash funds 
gives place to a plethora, and when the general distrust 
ceases, the cash funds coming forth from their hiding- 
places, ready to engage in any promising undertaking, 
then those two factors which started the depression exist 
no longer, and the depression itself should cease. And 
as it does not do so, there must be some other factor 
at work not covered by said theory. 

The latter, therefore, though accounting for the 
phenomena of a crisis, does not account for the phenom- 
ena of the depression. 

Another theory, more in accord with the facts, has of 
late years found many adherents. It hinges on the 
investment process, and is based on the observation that 
wherever that process leads to new constructions and to 
the creation of new productive capital and wealth, the 
degree of business activity, and therewith of prosperity, 
bears an almost exact proportion to the extent of such 
new constructions. Thus, the continuous avalanche of 



The Apparent Cause 



new undertakings and extensions as witnessed in the 
United States in the years 1905, 1906 and 1907 was 
coupled with an unprecedented degree of prosperity; 
ten or twelve years ago, when new enterprises were 
launched only to a limited extent, business languished; 
and if we extend our inquiry to unprogressive countries, 
like China and India, where there are practically no new 
constructions beyond the replacements necessary to keep 
up the status quo, we shall find a chronic stagnation of 
trade accompanied with great poverty of the masses. 
Wherever we look, we find almost invariably a close 
proportion between the degree of business activity and 
the extent of new constructions and enterprises. The 
funds required for the latter are furnished principally 
by the saving process — the savings and surplus earnings 
of individuals all over the country. So long as these 
savings 1 are invested in new constructions and enter- 
prises, they will give employment and income to the 
working men and business men engaged in these new 
constructions, and by means of the well-known process 
of action and reaction the activity created in these 
special lines of business will spread to other lines and 
stimulate demand and activity also among all the nu- 
merous trades which are engaged in the broad field of 
production of commodities — resulting in general business 
prosperity. But if the savings are not so invested they 
can not give employment to the working men and busi- 
ness men ordinarily engaged in new constructions, and 
the lull thus originating in the building lines will react 
upon general production and trade, and engender a 
depression. 

The foregoing theory, so long as it goes no further 
than developed above, is undoubtedly correct, and has 
been accepted by most of our economists, to that extent. 
But the disagreement begins when considering the ques- 



of Crises and Depressions. 



tion, What hinders the savings 1 from continuing to be 
invested in that beneficent way, i. e., in new construc- 
tions 3 and enterprises? Many explanations, differing 
more or less from each other, have been put forth to 
answer that question. 

Judging this question from my own point of view, I 
can state two specific causes for the stoppage of new 
constructions, the one the very opposite of the other: 
first, The extension of new constructions, like railroads, 
factories, houses, etc., may have been carried on to such 
an extent as to satisfy the demand for this kind of 
capital goods for the time being, thus causing a scarcity 
of opportunities for investment in this direction; sec- 
ond, the demand for new constructions may become so 
insatiable as to exhaust the funds of the money market 
and over-strain the credit facilities of our financial in- 
stitutions. 

The first-mentioned cause became operative with us 
in 1903 and 1904. In the years immediately preceding, 
lavish expenditures had been incurred in all sorts of 
new constructions, or in the extension of old ones, 
bringing the country's productive power up to a standard 
much beyond anything previously known, so much so 
that the demand for productive capital seemed to be 
satisfied for the time being. In consequence, the pace 
of new constructions slackened. The trades engaged in 
new constructions began to suffer, notably the iron and 
steel trade, and, by means of the well-known process of 
action and reaction, the dullness in the one line of trade 
created dullness in most other lines also — all due to the 
primary cause that the undertaking of new constructions 
was checked through the abundance of productive capital 
(railroads, factories, etc.) already in existence. 

The second of the two causes above mentioned may 
seem paradoxical, namely, that an excessive, insatiable 



The Apparent Cause 



demand for new constructions should engender a lull of 
that demand. But the process is not difficult to under- 
stand. An excessive amount of new constructions will 
absorb an excessive amount of cash capital and will cause 
a stringency in the money market, so much so that the 
latter is constantly kept on the verge of a general col- 
lapse. If on top of this stringency anything should 
occur that shakes confidence, all entrepreneurs will take 
flight at once, and the rush for new constructions will 
suddenly change to the contrary. If it does, the final 
result will be the same as in the former case, namely, 
a lull in new constructions. As soon as this lull sets in, 
the working forces 6 ordinarily engaged in creating new 
productive capital and wealth are thrown out of employ- 
ment, and the loss of income and of buying power on the 
part of these forces will react upon the forces engaged 
in the broad lines of production and trade, and engender 
the depression. Then a new factor sets in. While before 
the crash the country's productive capital was not large 
enough to fully meet the great demand for commodities, 
it is now too large for the reduced demand, so the stim- 
ulus for new constructions ceases. Thus we arrive at two 
factors causing the depression, first, the loss of confi- 
dence ; second, the shrinkage of the general demand, due 
to the lull in new constructions. The one factor initiates 
the depression, the other gives it continuity. The one 
ceases to operate after the panic is over; the other oper- 
ates as long as the depression lasts, generally for years 
in succession. This being so, it is evidently the second 
factor, the lull in new constructions, which must be con- 
sidered as the real basis of the depression. And it should 
be noted that this factor is entirely different from the 
one which originally gave rise to the crisis. 

The foregoing will explain how a stagnation in busi- 
ness may be brought about by either one of two factors. 



of Crises and Depressions. 



the one the very opposite of the other — a lull in the 
demand for new constructions on the one hand, and an 
excessive, insatiable demand for such on the other. In 
either case we arrive at the same final result, namely, a 
check to enterprise and to new constructions — the very 
thing which, according to the view of most economists, 
forms the governing factor of all depressions. 

This view, however, that the degree of business 
activity largely depends upon the extent of new con- 
structions that happen to be under way for the time 
being, is not exactly shared in by all of our economists,, 
some of them holding that it looks like putting the cart 
before the horse. According to their view the demand 
for new productive capital and for new constructions, 
such as we witness in seasons of booming business, must 
be attributed to the great demand for commodities, this 
being the governing factor; not that the heavy demand 
for commodities should be brought about by the great 
extent of new constructions under way. The fact is, we 
have here a case of reciprocal action. An augmentation 
in the rate of new constructions brings with it an aug- 
mentation of the country's business activity; and an 
increase in this activity, in turn, will increase the demand 
for new constructions ; the one factor constantly invig- 
orating the other. The governing factor, however, and 
the one that starts this reciprocal action, must be found 
in enterprise and new constructions. Suppose a railroad 
be built in an unprogressive country like China; this 
will give employment and income to many persons who 
would otherwise remain idle ; these persons, when ex- 
pending their income for commodities, give employment 
to other people, those who produce these commodities, 
and these people in turn, when expending their earnings, 
will furnish employment to still others, and these again 
to others, thus giving rise to a chain of action and re- 



8 The Apparent Cause 



action resulting in an enlargement of the community's 
total business activity — all of this being due to the 
building of the railroad. 

It seems hardly necessary to adduce further argument 
to prove how largely prosperity depends upon this im- 
portant factor: enterprise and new constructions. All 
experience confirms the fact that wherever the country's 
savings and surplus earnings are promptly invested in 
this direction, there business will be active and labor 
well employed. And experience equally confirms the fact 
that wherever that all-important factor is dormant, there 
depression prevails. Such being the case, we are evident- 
ly justified in concluding that the theory is correct which 
holds that the subsidence of enterprise and new con- 
structions, and the causes (whatever they may be) to 
which the subsidence is due, must constitute the true 
source of the depression. 

This theory seems quite plausible, being sustained 
by logic as well as by the facts. Nevertheless, it does 
not cover the ground. It gives only the apparent cause 
of depressions, not the real one. While we can take it 
for granted that the presence of the above-named factor, 
enterprise and new constructions, will stimulate business 
activity and prosperity, it does not necessarily follow 
that its absence must entail depression and stagnation 
in trade. 

There is a flaw in the theory. It does not sufficiently 
consider the question as to what becomes of the country's 
savings and surplus earnings if they are not invested in 
enterprises and in the creation of new productive capital 
and wealth. Why do they, in that case, fail to stimulate 
trade and prosperity? If they were not invested at all, 
they would accumulate in the money market, to an im- 
mense aggregate, which as we know is not the case. 
They are evidently invested nearly as fast as they accrue. 



of Crises and Depressions. 



And in the course of such investment they return into 
the channels of general trade, finally becoming scattered 
in the purchase of commodities. Why does not this sort 
of investment stimulate prosperity as well? 

Let us clearly define the point at issue. If the coun- 
try's savings and surplus earnings become invested in 
new constructions, they give employment to a certain 
class of working forces 6 , and business prospers; if in- 
vested in a different way, why do they not give employ- 
ment to some other class of working forces, and why do 
we see, on the contrary, a general lack of employment? 
If we could point out the reason why, in the latter case, 
their investment does not give employment to working 
forces, might we not fairly hope to obtain new light on 
the subject of depressions? 

Let us follow up this question. We may arrive at 
conclusions which shall show the existence of a factor, 
heretofore unknown, that is responsible for the unem- 
ployment and the lack of demand prevalent at times of 
slack business. 

The factor considered by many present-day econo- 
mists as all-important in bringing about a stagnation 
in trade- -the subsidence of enterprise and of new con- 
structions — is only the apparent cause of depressions. A 
factor more potent than this has escaped their attention. 
Once we understand the nature of this hidden factor and 
find means for checking its activity, enterprise and new 
constructions may practically come to a standstill, and 
yet business would prosper. 



In the foregoing, as well as in what follows, attention 
has been given primarily to the subject of Depressions, 
rather than to Crises. The latter are not so difficult to 



10 The Apparent Cause of Crises and Depressions. 

understand, in fact their cause is generally well known, 
so it would be unprofitable to enlarge upon their dis- 
cussion. Not so with depressions. Their origin is still 
so much enveloped in mystery as to justify the conclusion 
reached above, that there must be factors at work whose 
existence has heretofore remained unsuspected. 



CHAPTER II. 

HOW ARE SAVINGS INVESTED AT 
TIMES OF DEPRESSION? 

MOST economists hold that in times of depression 
the savings and surplus earnings of individuals, 
then accruing, will largely remain in the money market 4 , 
staying there, for years in succession, in the shape of 
"liquid capital." 

Is this view consistent with the facts? When consid- 
ering the stupendous annual aggregate of savings made 
in a country like the United States, the retention of any 
large portion thereof in the money market would repre- 
sent a huge sum, entirely out of proportion to the amount 
of liquid capital actually found there at any one time. 
When further taking into account that every year of 
depression ought to increase that huge sum and ought 
to add to the stock of idle cash funds, while no such in- 
creases are revealed by the actual trend of the money 
market, the above view seems to be quite untenable. 

The behavior of the money market, far from showing 
a growing accumulation of liquid capital at such times, 
will rather impart the impression that the savings funds 
flow out about as fast as they flow in, and that a steady 
absorption of these funds goes on, nearly as fast as at 
times of prosperous business. True, they are not invested 
in the field legitimate for savings funds, i. e., in the for- 
mation of additional wealth or capital goods, such as 
railroads, houses, factories, etc., for there is but little of 
this kind of capital 2 built up in times of depression. But 
they are surely absorbed in some way. 

How this absorption is taking place ; how those funds 



12 How Are Savings Invested 

can be invested and transformed into capital 2 without 
the concurrent creation of new capital — this subject, 
though of vast practical importance, has not received the 
attention which it deserves. 



Let us, first of all, form an idea of the approximate 
extent of the country's saving power. 

Between the years 1890 and 1900 the wealth of the 
United States increased about 23 billion dollars, or 2,300 
millions per annum. Considering that during the four 
years of depression from 1893 to 1897 the accumulation 
went on at a slower rate, the increase must have aver- 
aged, for the remaining six years of the decade, as much 
as three billions. In the recent highly prosperous years, 
since 1900, it may have averaged not less than four bil- 
lions.* 

Of the latter amount we may safely assume as much 
as three-fourths to represent savings, i. e., surplus earn- 
ings;! ar, d we thus arrive at a total of, say, three billions 
per annum as approximately representing the country's 
saving power. 

Having thus approximated the saving power, let us 
see to what extent these savings can find investment in 



* A recent Government publication states the increase of the 
country's wealth for the four years 1900 to 1904 to be about 19 bil- 
lions — almost 5 billions per annum. 

t Not all of the country's annual increase of wealth represents 
surplus income. Part of that increase is the result of appreciation of 
property, due to a rise in market value; another part may be the re- 
sult of personal efforts, for instance, where a farmer improves his 
property by his own toil. If we figure the increase of wealth re- 
sulting from these and other sources to be one-fourth of the total 
increase of four billions, this would leave three billions to represent 
the wealth derived from surplus income. 

All of these figures are guesswork and on that account may not 
be considered a reliable basis on which to build up an important 
economic principle. Still, if they are only roughly correct, they an- 
swer the purpose of this discussion. Exact figures are neither avail- 
able nor necessary. 

A further discussion of this subject will be found in the footnote 
on page 115. 



at Times of Depression? 13 

the creation of new wealth (i. e., in new constructions) 
at a time of prosperity and again at a time of depression. 
It is well known that under prosperous conditions prac- 
tically all of the savings are so invested. Taking this for 
granted we would arrive at the following equation: 

Saving power of the people, per annum $3,000,000,000 

Savings invested in building up new capital, or in cre- 
ating additional wealths, per annum 3,000,000,000 

Now, suppose a period of depression sets in, equally 
severe as the one witnessed in the years 1893 to 1897. 
Our capitalists will not go then into new enterprises to 
such an extent as they did of late, and will not continue 
to build up new capital at the rate of three billions a 
year ; perhaps not even at the rate of one billion. Assum- 
ing the latter amount to be sufficiently near the correct 
figure, and assuming further that the people's saving 
power will be reduced by as much as one billion dollars, 
owing to the depression, our equation would be changed 
as follows: 

Saving power of the people UNDER FAVORABLE 

CIRCUMSTANCES, per annum, same as above $3,000,000,000 

Saving power, at a time of depression, reduced to, say 2,000,000,000 
Savings actually invested in building up new capitals, 

per annum 1,000,000,000 

At times of depression only a part of the people's sur- 
plus earnings can still be employed in the creation of 
wealth ; according to the above equation only one billion 
out of two billions of savings. What becomes of the bal- 
ance? 

That balance, whatever it amounts to, is by no means 
barred from finding profitable investment, and is surely 
turned into capital 2 . Evidently, if one field of invest- 
ment becomes closed, another one opens. But how this 
is done; how savings can be turned into capital without 
at the same time forming new capital, this question has 
not so far been treated in a conclusive manner. 

A number of theories have been advanced to explain 



14 How Are Savings Invested 

what becomes of savings funds in times of depression. 
Let us review these explanations, including the one al- 
ready referred to, and let us see whether they can stand 
scrutiny. 



EXPLANATION NO. 1.— If savings do not find im- 
mediate employment, they will find it later on, after the 
depression is over; the final investment, such as leads to 
the formation of new capital, being simply deferred, and 
the savings meanwhile remaining in the state of "liquid 
capital." Thus they provide part of the cash funds needed 
at the time of subsequent recovery in trade. For instance, 
the savings made during the years of depression from 
1893 to 1897, so far as not absorbed at the time, consti- 
tuted part of the cash capital which was utilized later on 
for the numerous enterprises launched at the time of the 
ensuing "boom". 

REPLY.— If the savings made between 1893 and 1897, 
or a large part of them, were really left unabsorbed for 
the time being, where were they to be found? Did they 
stay in the money market? 4 As is well known, savings 
gravitate toward the latter, appearing there as employ- 
ment-seeking funds. But even if only one billion dol- 
lars per annum, i. e., only one-third of what the savings 
at the present prosperous time (1907) amount to, had 
stayed in the money market in the shape of "liquid capi- 
tal seeking investment," a four years' accumulation 
would have amounted to four billion dollars of idle cash 
funds, a sum larger than the whole supply of money in 
the United States. As a matter of fact, the money mar- 
ket took an entirely different turn. If we take the sur- 
plus funds of the commercial banks as a gauge by which 
to judge the amount of unemployed cash capital extant, 
we find indeed that a moderate accumulation took place 
soon after the panic of 1893 had set in, amounting to a 



at Times of Depression? 15 

few hundred millions; but this accumulation gradually 
disappeared, so that around 1897 hardly any of it was 
left — showing that all surplus earnings had been absorbed 
in the meantime. Do these facts confirm the above "Ex- 
planation"? 

It may be held that the course which the money mar- 
ket took during those years of depression in the United 
States was exceptional, and that in other periods of de- 
pression the superabundance of liquid capital has been 
more pronounced. But the principal sign which naturally 
ought to accompany the steady accumulation of savings 
funds, viz., the constant growth of unemployed cash 
funds in the money market, augmenting from year to 
year while the depression lasts, has never been observed. 
As a matter of fact the general drift of the money market 
has not varied much in other depressions, whether in 
Europe or America, from the course above described. And 
in none of them has there been an accumulation of funds 
at all commensurate with the vast amount of savings 
which flowed into the money market and were not ab- 
sorbed in new enterprises, and which according to Theory 
No. 1 should have accumulated there. 

Much has been made of the fact that the rate of in- 
terest shows a tendency to decline in periods of depres- 
sion, thus betraying a greater pressure of cash capital to 
find employment. This pressure no doubt exists ; but to 
deduce therefrom, or from the declining rate of interest, 
(the cause of which will be explained in a subsequent 
chapter) that there must be exceptional accumulations of 
cash funds, although statistics fail to reveal them, is an 
unwarrantable conclusion. If such idle cash funds, run- 
ning into billions, really existed, they would first of all 
appear in the commercial banks. But inasmuch as the 
weekly bank statistics disprove the existence of these 
huge idle funds, Theory No. 1 cannot be true. 



16 Hon) Are Savings Invested 

EXPLANATION NO. 2.— The surplus earnings find 
temporary employment, say in the shape of loans, and 
in many other ways, until the return of activity in trade 
ushers in a new demand for liquid capital, and opens up 
opportunities for permanent investment. 

REPLY. — It would not be an easy matter to point out 
many instances where surplus earnings, or, as it were, the 
cash funds representing them, find investment of a merely 
temporary nature. In most instances the supposed tem- 
porary investment will either prove to be a peimanent 
one, or will prove to be no investment at all, so far as the 
funds as such are concerned. A real, genuine investment 
of cash funds will lead them to be split up into hundreds 
of fragments; they will go in payment for goods or ser- 
vices, will lose the character of cash capital, and will 
leave the money market. If they do that, they generally 
have found permanent investment. If they do not come 
to be scattered, they most likely have found no invest- 
ment at all, but have only changed owners — a subject 
which will be treated more fully further on. (See "Ex- 
planation No. 8.") 

Let us analyze a case of what may seem to be a tem- 
porary investment. Suppose A saves $1000 and lends the 
money, for the term of one year, to B, who uses it to 
extend his factory. When so employed the money is 
turned into "fixed capitaV and, though loaned out tem- 
porarily only, is permanently invested. By the end of 
the year B will not be able to return the money, except 
with the help of new savings, or with the help of fresh 
funds procured elsewhere. He may have saved up that 
amount of $1000 himself in the meantime; but then the 
money returned to A represents B's savings, not A's any 
more ; or he may make a new loan elsewhere, and procure 
the money from C, to pay off A ; then the amount repre- 
sents C's or somebody else's savings. In either case the 



at Times of Depression? 17 

original funds saved up by A remain permanently in- 
vested in the factory. 

Just so with the great majority of all other invest- 
ments, such as may seem to be of a temporary character. 
Take, for instance, the investment of such funds as are 
loaned out by the commercial banks of New York to the 
business community of that city, aggregating more than 
a billion dollars. Each of those bank loans is of a tem- 
porary character, and one should think that the invest- 
ments for which the funds are used by the borrowers 
must likewise be of a temporary character. But as a 
matter of fact, those bank loans represent, in their en- 
tirety, a permanent investment. The repayment of the 
individual loans is rendered possible only by the constant 
issuing of new loans; though not to the same party, 
still to the community. As soon as the banks try to re- 
strict the aggregate of their loans, they meet with great 
difficulty, for the money needed to repay the maturing 
loans is not in existence.* That billion dollars, therefore, 
though seemingly consisting of "liquid capital," turns 
out to be permanently invested by the business com- 
munity, and, broadly speaking, no part of it can be re- 

* The money is not in existence! This is true, despite the fact 
that the funds loaned out by the commercial banks are generally re- 
deposited with the banks, and therefore not only in existence but 
seemingly within their reach. We have to bear in mind that the 
"money in bank," i. e. the fictitious money represented by bank 
credits, is the outcome of loans; so, if there is a bank-credit on the 
cne hand there is generally a corresponding loan on the other — and 
•the individuals in whose names the bank credits stand are mostly 
not those who obtained the loans. Now, if the banks wish to with- 
draw part of the credit money extant in order to reduce its volume 
they can not withdraw it from the individuals in whose names the 
credits stand but must have recourse to those to whom they made 
the original loans — and since these individuals borrowed the money 
to invest it in their business, buying either fixed or circulating capi- 
tal with it, they are no longer in possession of same. These indi- 
viduals can maintain their solvency only by constant renewals of 
their loans, eventually shifting them from one bank to the other. 
But if the banks would try to largely restrict their loans, say by 
one-half, and would accordingly refuse to make renewals, many of 
those individuals would simply be unable to pay their "maturing obli- 
gations, and would have to suspend payments. And the banks would 
at once find out that the money needed for canceling a large part of 
their loans, say a quarter or a half of the total, is not in existence. 
See also footnote on page 23. 



18 How Are Savings Invested 

turned for good except by the tedious process of saving 
on the part of members of the community. 

Outside of the oases here discussed there exist, no 
doubt, investments of a really temporary character; for 
instance where a man loans out money to help buying or 
making season goods, and where the money is returned 
after the season is over, and after the goods have been 
sold and paid for. Such transactions would be the only 
ones that properly come within the scope of "Explana- 
tion No. 2". They are quite limited in extent; and, what 
is more important, they occur oftener at times of great 
business activity than at times of depression — a fact 
which economists will hardly dispute. Explanation No. 
2 could stand only if such occurrences were much more 
frequent in hard times, so much so as to employ and ab- 
sorb a much larger part of the people's savings than is 
done in times of prosperity. The reverse being true, Ex- 
planation No. 2 proves to be utterly inadequate to show 
what becomes of surplus earnings at times of depression. 

EXPLANATION NO. 3.— Periods of great business 
activity drawn heavily upon the "liquid capital" of the 
community, so much so as to finally bring about an 
almost complete exhaustion thereof. The savings made 
in the subsequent period of depression are needed to re- 
plenish the fund of liquid capital available for new en- 
terprises. 

REPLY. — The fund of liquid capital can be replen- 
ished only by the accumulation of cash funds. As nobody 
has so far been able to detect the whereabouts of such 
accumulations, which in the course of a few years of de- 
pression ought to run into billions if they were to absorb 
a large part of the savings, the "replenishing theory" 
cannot be substantiated. My replies to Explanations 
Nos. 1 and 2 will also apply here. 

The very basis underlying Explanation No. 3 is 



at Times of Depression? 19 

wrong, namely, the assumption that for smooth working 
there shouid always be a large fund of liquid capital ex- 
tant, available for new enterprises. Actual facts show 
this accumulation to be rather small, at active times as 
well as at dull times. As a rule, savings, the source of 
that fund, flow into the money market and flow out 
again, but they do not stay long enough to accumulate to 
a great extent. That accumulation fund will at no time 
amount to more than a few hundred millions, so it can- 
not take billions and billions to replenish it. If, prac- 
tically, there is no fund to be replenished, the "replen- 
ishing theory" cannot stand. 

EXPLANATIONS NOS, 4 AND 5.— Before considering 
these two Explanations individually I will say that both 
of them refer to the over-straining of credit facilities dur- 
ing the period preceding a depression and to the alleged 
necessity of a subsequent relaxation. Our discussion of 
the subject will be helped if we first reach a clear under- 
standing as to the source of credit. There are two dis- 
tinct sources. The one (to be treated in Explanation No. 
4) comprises such loans as one individual will make to 
the other, or as are made by savings banks, life insurance 
companies, etc., i. e., by such credit institutions as loan 
out no more money than they receive ; the funds orig- 
inally having accrued from the saving process. The other 
source (to be treated in Explanation No. 5) comprises 
loans made by the commercial banks, who create new 
cash funds of their own, of an artificial nature; bank 
notes on the one hand and bank credits on the other; the 
latter being founded on the principle that $1,000 loaned 
by a commercial bank to an individual is left by this in- 
dividual on deposit with the bank, or, if transferred by 
him to other parties, will still remain in the shape of a 
deposit with some other bank or banks, and will then be 



20 How Are Savings Invested 

used by the business community the same as cash funds 
("money in bank") though not really consisting of cash.* 
Only these artificial cash funds, which have nothing to 
do with the saving process, come in under Explanation 
No. 5. 

EXPLANATION NO. 4.— At busy times too many en- 
terprises are undertaken "on credit", by incurring debts. 
The subsequent time of depression and of "forced 
economy" is needed to pay off at least a part of those 
debts. During this time the savings of the people are 
not employed so much towards creating new productive 
capital as towards cancelling the debit obligations previ- 
ously contracted. 

REPLY. — It may seem quite evident that if people want 
to pay off their debts, they must save, and that their 
savings will be absorbed when paying off the debts. But 
the question arises, What will the receivers of the funds, 
so paid over, do with them? Are the funds, as such, really 
absorbed when used for the payment of a debt? Is it not 
true that they merely change owners and remain "funds 
available for investment", only in somebody else's hands? 
If A saves $1,000 and pays this amount to B in cancel- 
lation of a debt, B may invest the money in some enter- 
prise, just the same as if it had not previously been used 

* This redepositing of the loans constitutes the reason why the 
deposits in commercial banks represent part of the country's money 
supply, while those put into savings banks do not. Savings banks, 
when issuing a loan, part with the money loaned out; the commer- 
cial banks do not, broadly speaking. Inasmuch as the funds loaned 
out by the commercial banks are redeposited with the banks, they 
practically remain cash funds, and are considered as such and used 
as such by the business community. Not so with the deposits in 
savings banks; these represent, not "funds on hand," but "funds in- 
vested"; not liquid, but productive capital. 

Just so with the Trust Banks. When confining themselves to 
their legitimate sphere, they part with the money deposited with 
them, and invest it in securities, the same as the savings banks do. 
The deposits so invested should not be considered as part of the 
country's money supply. 

Of late, however, the Trust Banks have largely gone into the 
business of commercial banks, not investing their deposits so much 
in the purchase of securities, but loaning them out, subject to check, 
the same as commercial banks do. Such deposits, subject to check, 
should indeed be counted as liquid capital, increasing the country's 
money supply, and are so counted on pages 154, 156 and 164. 



at Times of Depression? 21 

to cancel a debt. Evidently, if B does so invest the 
funds, the latter did not previously find investment by 
the act of A paying them over to B; i. e., not by their 
being used to pay off a debt. Cash funds, as such, cannot 
be considered as having been invested until they are 
scattered in the general circulation and cease to be "cash 
funds available for investment", and until they leave 
the money market. As such is not the case if they are 
merely used to pay a debt, the theory set forth in Ex- 
planation No. 4 to account for the disappearance of sav- 
ings funds from the money market is not substantiated.* 

It is true that at busy times (and in fact at all times) 
many enterprises are undertaken on credit, one individ- 
ual borrowing the funds accumulated by another. It is 
equally true that some of the debts thus incurred by in- 
dividuals may be cancelled out of savings made by these 
individuals during the subsequent period of depression. 
But it is not true that such savings funds should be ab- 
sorbed and cease to be cash capital when so applied, or 
should thereby be withdrawn from the money market. 
If nevertheless they disappear from there, they evidently 
find an outlet different from the one assigned in Explana- 
tion No. 4. 

If the assumption were correct that at times of de- 
pression the people's savings are more largely applied 



* It may seem that we should not only consider the act of pay- 
ing the debt but also the question as to what the payee does with 
the money afterwards. Let us take some examples. Suppose he uses 
it for building a house. If so, the funds would find investment in 
creating new wealth — while in this chapter we are discussing the 
question how they can find investment without the creation of new 
wealth, the fact being that at times of depression (such as we are 
now considering) the opportunities for the creation of new wealth 
are quite limited. Suppose he squanders the money. Then an in- 
vestment does not take place at all, and again we gain no clue as 
to how surplus earnings are invested in times of depression. This 
latter point is the only one we are considering in this chapter, and 
in the text above we are specially considering the question whether 
the act of repaying a loan constitutes an investment of the money 
so paid over. We are not discussing the broad question as to what 
may possibly be done with the money after it has been used for re- 
paying a loan. 



22 How Are Savings Invested 

toward paying off debts and canceling loans, this ten- 
dency should manifest itself in the case of savings banks 
and insurance companies. The loans they had issued be- 
fore should be largely paid back to them and they should 
be at a loss as to what to do with their funds. As a 
matter of fact, no such tendency manifests itself at times 
of depression. 

EXPLANATION NO. 5. — In periods of great business 
activity there is more productive capital built up than 
can be procured from the people's savings accruing at 
the time ; the excess being built up on the strength of 
funds supplied by credit institutions, with the result of 
exhausting and unduly straining all credit facilities of 
the community. The savings made in the subsequent pe- 
riod of depression are needed, therefore, for putting the 
credit institutions on a sound basis again. 

REPLY. — There is some truth in this statement, but 
very little. As a matter of fact, the credits issued by 
our financial institutions are not relieved or reduced ma- 
terially in a period of depression. During our late de- 
pression of 1893 to 1897 the credits issued by our com- 
mercial banks were reduced by only 135 million dollars. 
Suppose that this loan reduction was entirely due to the 
savings made on the part of the borrowers (though it 
may as well have been due to other causes), could this 
small amount explain what became of the 4,000 million 
dollars of savings, which flowed into the money market 4 
in the course of those four years, and whose outlet is left 
unaccounted for? 

Let it be well understood that we are dealing here 
only with such credit institutions as really create credit 
funds, i. e., the commercial banks; not with institutions 
(like savings banks) who merely lend out funds that 
were already in existence, and who practically act only 
as mediators between the owner of such funds on the one 



at Times of Depression? 23 

hand and the borrower on the other. It is hardly the 
latter class of institutions which come in consideration 
when speaking of over-strained credit conditions, for the 
extent of the credits they grant is bound to keep a close 
proportion to the extent of the funds entrusted to them 
by the public. Not so with the commercial banks. With 
them the amount of credits issued depends largely upon 
the requirements of the market and a strain may readily 
take place if they create artificial funds to an extent near 
the safety limit, either by the issue of bank notes or by 
the extension of bank credits. 

These artificial funds can be used for the creation of 
new wealth precisely the same as funds accruing from 
savings. They can be used for that purpose only once,* 
the same as savings can be used only once. Thus, if their 
total volume increases from 3 billions to 4 billions, the 
increase of 1 billion represents cash funds available for 
building up one billion dollars' worth of new productive 
capital, or of new commercial capital. At busy times 



* It may seem as though such "credit money" can be employed 
over and over again towards building up new productive capital, 
inasmuch as it is constantly reverting to the issuers, and constantly 
being reloaned. But that supposition would be wrong. Most of those 
reloaning transactions represent a mere shifting of borrowings; a 
contracting of new debts to pay old ones. Suppose a merchant, A, is 
short of $50,000 to conduct his business on a cash basis, and that he 
constantly has notes afloat, aggregating that amount, to make up 
for the deficiency. These notes, successively issued in payment for 
the goods he buys, and discounted in various banks, will cause a 
frequent shifting of cash funds; but the aggregate of these trans- 
actions will amount to the same thing as a permanent loan of $50,000 
to that merchant, on the part of the banks, as though it were a 
permanent investment of the banks' credit money in A's business, 
that bank money having been used by him to build up part of his 
"circulating capital." Now suppose A saves up $50,000, and pays all 
his notes, issuing no more of them. Then the banks' funds become 
free to that amount, to be lent out to some other borrower, B; this 
time for real investment purposes, i. e. for creating new capital goods. 
But the reader will readily perceive that the funds thus becoming 
available for investing purposes really consist of A's savings. Seem- 
ingly the capital goods created by both A and B. aggregating $100,000, 
have all been built up with credit money advanced by the banks; but 
as a matter of fact only $50,000 came from that source, the other 
$50,000 from the saving process. So the issue of $50,000 credit money 
will only once build up new productive capital to that amount. Every 
additional million dollars of bank notes or bank loans issued can be 
made available for creating new wealth to the like amount, and to 
that extent only. 



24 How Are Savings Invested 

a tendency prevails towards a rapid increase of such 
"credit money"; at dull times, towards diminishing its 
volume. To find out how much its volume diminished 
during our depression of 1893 to 1897, we have to sub- 
tract the total volume existing at the end of that period 
from the total existing before the depression set in; as 
follows : 

Total credit money extant in 1892: Bank notes $174; 
loans of National Banks $2171; of State Banks 
$757 millions; in all $3,102,000,000 

Total credit money extant in 1897: $230; $2067; $670 

millions; in all 2,967,000,000 

Showing a decrease of 135,000,000 

This small reduction of 135 millions* can, at best, ac- 
count for the absorption of only an equal amount of the 
savings made during that period; but does not explain 
what became of the balance of the savings. If, as as- 
sumed in the early part of this chapter, the total of the 
savings, left unaccounted for, amounted to 1000 millions 
per annum, or 4000 millions for the four years from 1893 
to 1897, the small share of this total which is represented 
by the above-stated amount of 135 millions cuts no figure. 

######## 

The importance of credit money, in so far as it con- 
tributes cash funds towards building up new productive 
capital, seems to have been much exaggerated by our 
economists. That amount is quite small, when compared 
with the amount supplied by the saving process. Savings 
funds are always flowing into the money market quite 
freely ; but they soon find investment and disappear, 
never to be seen as:ain, while credit money will constantly 
reappear in the money market and be lent out over and 



* The deposits in Trust Banks are not considered in the above 
statement. At that period the Trust Banks did very little businoas 
of such character as the commercial banks do (see footnote, page 
20 ), so their deposits could not, at that time, be classed the same 
as deposits in commercial banks and did not really constitute part of 
the country's money supply. 



at Times of Depression? 25 

over again, a fact which may impart the impression that 
there is more productive capital built up with credit 
money than with savings funds. We should bear in mind, 
however, that credit money can be used for that purpose 
only once, and only in proportion as its total volume in- 
creases. The following figures will serve to show the 
extent of this increase, for the years 1890 to 1900 : 

1S90: Total of credit money then extant: Bank notes 
$186; loans of National Banks $1986; of State Banks 

$581 millions; in all $2,753,000,000 

1900: $310; $2710; $1030 millions; in all 4,050,000,000 

Snowing an increase of 1,297,000,000 

Was the whole of this latter amount available for 
new constructions, or the creation of new wealth ? Hardly. 
Part of it was tied up owing to the fact that the banks 
needed so much more legal reserve ; another part was 
absorbed by losing enterprises, by squandering, by re- 
pairs, replacements, etc. For the sake of argument let us 
assume that out of the $1,297,000,000 increase of credit 
money just stated, as much as one billion was available 
for new constructions, though in reality it was less. Dur- 
ing the same period of 1890 to 1900 the country's wealth 
increased by about 23 billions. Of this amount perhaps 
one-quarter was made up by "appreciation of value" (see 
footnote, page 12), the balance, say 15 billions, by the 
creation of new wealth. Of the cash funds necessary to 
create this wealth there was one billion supplied by the 
issue of credit money, the balance, say 14 billlions, by 
the saving process. 

Reviewing explanation No. 5 in the light of these fig- 
ures, we find that only a small share of the productive 
capital (in this case one-fifteenth) is being built up with 
credit money; and of this small share only a small part' 
is cancelled in a period of depression — only 135 millions 
during the said four years. Were the reverse true ; were 
the cash fui*ds required for new enterprises supplied prin- 



26 ' How Are Savings Invested 

cipally by the issue of credit money, and were a large 
proportion of this credit money cancelled by the savings 
made during a subsequent depression, then we could 
argue that there is an inherent necessity for a period of 
depression to follow a period of strained credits and of 
great business activity. Then, Explanation No. 5 would 
stand substantiated. But not where all facts point to the 
contrary.* 

EXPLANATION NO. 6.— The surplus funds are to a 
larger extent absorbed in "unproductive consumption," 
which results in an increase of the demand. 

REPLY. — This argument is met quite often in modern 
economics. On general principles it may seem obvious 
that if on the one hand the surplus earnings are not ap- 
plied toward new constructions or the creation of new 
wealth, and on the other they do not accumulate in the 
money market, they must be used, to a greater extent 
than usually, for the purpose of consumption. In fact, 
many economists sbare in the belief that if towards the 
end of a boom period it appears that more productive 
capital has been built up than the demand for the time 
being will warrant, and if in consequence a tendency 
arises to abstain from new constructions, then the sur- 
plus earnings, finding only partial employment in new 
constructions, are more largely applied towards the sat- 
isfaction of personal wants — for the purchase of luxuries 
and consumptibles. And the theory has it that as a result 
of this increased purchasing power, which means an in- 



* In the foregoing- the fact that, from 1893 to 1897, an amount of 
$135,000,000 of loans was repaid to the financial institutions, has been 
attributed to the assumption that this amount represented so much 
savings, but, as already stated, this reduction of the loan account) 
may be due to other causes; for instance, to the shifting of loans 
from the commercial banks to the trust companies, or to the reduced 
demand for accommodation on the part of business men, conse- 
quent upon the lessened activity of trade. If so, there would not re- 
main even a nominal basis for Explanation No. 5. 



at Times of Depression? 27 

creased demand for consumptibles, and naturally an in- 
creased production of the latter, the general demand pre- 
vailing in the country will expand and gradually become 
large enough to fully employ the productive capital then 
in existence, whereupon a demand for additional pro- 
ductive capital will spring up and usher in a new boom 
period. 

According to this theory the demand for consump- 
tibles is greater in a depression period than in a boom 
period — a conclusion which runs counter to all experi- 
ence. 

Again, if people, instead of accumulating and invest- 
ing part of their income, will spend it in luxuries (which 
is the gist of the above theory) we cannot talk of "sur- 
plus earnings" any more; the latter representing such 
income as is left after providing not only for the neces- 
saries of life but also for luxuries. 

If there is more "unproductive consumption" at times 
of depression, and if such unproductive consumption will 
afford opportunities for real investment of surplus earn- 
ings, the modus operandi should be explained. That has 
not been done so far. Explanation No. 6, therefore, 
neither explains what becomes of surplus earnings at 
such times, nor does it agree with the facts when assum- 
ing that they are employed towards increasing the de- 
mand for consumptibles. Times of depression do not 
show an increase of consumption. 

EXPLANATION NO. 7.— The surplus funds are ap- 
plied in a larger measure for unproductive public ex- 
penditures, for the building up of what we may call "un- 
productive capital"; such as schools, works of art, em- 
bellishment of cities, sanitary improvements, hospitals, 
etc. 

REPLY. — This assumption likewise runs counter to ac- 
tual facts. In years of depression the expenditures made 



28 How Are Savings Invested 

for such purposes do not increase; on the contrary, they 
decline. 

This is still more true of private expenditures for 
unproductive purposes, such as the buying of carriages, 
automobiles, yachts, palaces, pictures, etc. Nobody will 
dispute that less money is spent on such investments in 
hard times, even by the rich. Point No. 7 would hold 
good only if the reverse were true, i. e., if an increased 
amount were spent at such times. 

EXPLANATION NO. 8.— The surplus funds are more 
largely absorbed by investments in mortgages and pub- 
lic securities 

REPLY. — Many people think that the mere purchase 
of bonds and mortgages, already issued and already in 
the market, constitutes an investment. It does so from 
the standpoint of the individual capitalist, but not from 
that of the cash funds as such. If A buys a bond from 
B for $1000, the purchase will no doubt constitute an in- 
vestment so far as A personally is concerned; but the 
money as such does not find investment by the purchase ; 
it continues to be idle, investment-seeking cash capital, 
only in B's hands instead of A's. And it remains in the 
money market, now as before. What B does with the 
money later on has nothing to do with our subject, and 
in this connection I refer to the foot-note on page 21: 
what has been said there will also apply here. So we are 
justified in saying that the mere purchase of bonds or 
mortgages, where the purchase money remains in the 
shape of cash capital, does not constitute a real and final 
investment for cash funds, and cannot possibly form an 
outlet for the savings funds which keep on flowing into 
the money market and which nevertheless do not accumu- 
late there. 

EXPLANATION NO. 9.— The surplus earnings find 
investment abroad. 



at Times of Depression? 29 

REPLY. — In what shape do they go abroad? In the 
shape of money? Or of merchandise? Or through the 
instrumentality of foreign exchange? 

Most people believe that funds can be sent abroad 
without the necessity of gold shipments; say, by bankers' 
drafts ; i. e., by a mere shifting of credits. But this is not 
so. Very few people have a clear conception of the func- 
tion of foreign exchange, and the less they know about 
it the more are they inclined to attribute all sorts of 
mysterious powers to its agency. A discussion of this 
subject will be found in the footnote on page 116. 

As to the migration of surplus earnings in the shape 
of cash, statistics do not bear out the idea that during 
hard times billions of money are sent abroad. This would 
necessitate large remittances of gold, while as a matter 
of fact a country's net movement of gold (the "net" 
being the difference between a year's exports and a year's 
imports) is not seriously affected by a period of depres- 
sion, and the balance may as well appear on the credit 
side as on the debit side. As a rule such shipments 
of gold merely represent the residual balances of foreign 
trade transactions, very seldom foreign investments. And 
invariably they are of a rather limited extent. 

Nor do statistics bear out the idea that in hard times 
the surplus earnings go abroad in the shape of merchan- 
dise. This would necessitate a sudden enormous increase 
of exports without a corresponding increase of imports. 
True, there is a reason why exports should expand at 
such times, inasmuch as wages and prices shrink, and the 
home market thus becomes better fitted to meet foreign 
prices and to enter into foreign competition. But such 
an expansion of the exports is a plant of slow growth 
and really depends upon commercial causes and market 
conditions, not upon the intention of capitalists to invest 
their funds abroad. Under favorable market conditions 



30 Hon Are Savings Invested 

such increase of exports takes place anyway. If it does, 
and if in consequence a country's foreign trade leaves a 
balance in its favor, showing a surplus of, say, $100,- 
000,000, then the capitalists of that country may invest 
this amount in foreign securities, instead of having that 
balance paid over in the shape of cash ; and there we 
would have a clear case of investing capital "abroad". 
The rule is, however, that there must first be a favorable 
trade balance and then there is room for investing do- 
mestic funds in foreign securities — a subject which will 
be more fully discussed on page 134. To assume that at 
times of depression capitalists will buy up large lots of 
domestic goods, and send them to foreign countries, in 
addition to the usual movement of export goods — this 
idea is not worth serious consideration and is in no way 
borne out by statistics. 

We have to conclude, therefore, that at such times 
our idle surplus earnings cannot find employment by 
migrating abroad. 

EXPLANATION NO. 10.— In times of depression the 
saving power of the community relaxes,- resulting in a 
shrinkage of the volume of savings and surplus earnings, 
and therewith of the funds which constantly flow into the 
money market to seek investment there. Thus, if on the 
one hand there are admittedly less opportunities for in- 
vestment, there are, on the other hand, less funds looking 
for investment. 

REPLY. — This view is undoubtedly correct. Inasmuch 
as the earnings of the people fall off, their saving power 
as' well as their aggregate savings will decrease. But 
that does not do away with the fact that of the savings 
still remaining only a part is being absorbed by new con- 
structions — a fact which economists will hardly dispute. 
To bring this point out more clearly, let us illustrate it 
by the use of figures. 



at Times of Depression? 31 

Let us assume that : 

The aggregate surplus earnings per annum in prosper- 
ous times (practically all of them being invested in 
the creation of new capital2 or wealth) come to $3,000,000,000 

At a time of depression the aggregate annual surplus 

earnings shrink to ,2,000,000,000 

Of which amount there is invested in the creation of 

new wealths, say 1,000,000,000 

Leaving a balance of surplus earnings, the mode of in- 
vestment of which is not known, amounting to 1,000,000,000 

"Whether the last-mentioned figure should be one bil- 
lion, or only half a billion, does not matter much for the 
sake of our argument. It certainly is a large amount. 
And the disappearance of this large share of the savings 
is left unexplained by Explanation No. 10. The latter 
only states that the total of the savings will fall off; but 
it does uot show what becomes of the savings that are 
still being made. To show that, is just the point in 
question. 

Explanation No. 10 would cover the point only if the 
aggregate savings could be assumed to diminish always 
at the same'rate as the opportunities for building up new 
capital 2 diminish ; as it were, that a million dollars of 
savings could be made only if there were opportunities 
for investing that amount in the creation of new wealth, 
and that if there were no opportunities for investing more 
than half a million in that manner, no more than the 
latter amount could be saved. Such an assumption, how- 
ever, could neither be proved by theory nor substantiated 
by facts. 



In the foregoing pages I have reviewed the various 
explanations now extant purporting to show how sur- 
plus earnings arc invested in times of depression, and 
I have proved every one of these explanations to be un- 
tenable. While it is generally conceded that at such 
times the surplus earnings do not find investment in new 
constructions (except to a limited extent) the true man- 



32 How Are Savings Invested 

ner of their investment has never been revealed. I have 
demonstrated that: 

First. — They do not accumulate in the money market. 

Second. — They do not, to a larger extent, go into in- 
vestments of a temporary character. 

Third. — They do not assume the shape of "liquid 
capital. ' ' 

Fourth. — They do not become absorbed when used for 
paying debts. 

Fifth. — They are absorbed only to a very limited ex- 
tent, if at all, in augmenting the reserves of the credit 
institutions. 

Sixth. — They are not dissipated in luxuries, or in a 
greater satisfaction of personal wants. 

Seventh. — They are not, in a larger measure, applied 
to the creation of what we might call "unproductive 
capital." 

Eighth. — They do not become absorbed if invested in 
the mere purchase of mortgages, securities, etc. 

Ninth. — They do not go abroad to find investment 
there. 

Tenth. — The theory that the aggregate of savings 
diminishes in the same proportion as the opportunities 
diminish for investing them in new constructions or in 
the creation of additional wealth, cannot be substantia- 
ted. 

No doubt a shrinkage in the aggregate of savings or 
surplus earnings takes place, when times of depression 
set in. Nevertheless it is generally conceded that at such 
times large volumes of savings funds would still be avail- 
able for new enterprises if there were opportunities for 
profitable investment in that direction. These savings 
funds keep on right along flowing into the money market; 



at Times of Depression? 33 

only part of them is absorbed in the creation of new 
wealth; the balance disappears; but the nature of the 
outlet still remains to be discovered. Where does that 
balance go? 

That question, though seemingly of a purely academic 
character, is of vast practical importance. If we can 
answer it, we may find ourselves in possession of the key 
to the solution of the greatest problem of the age: the 
cause of depressions. 



CHAPTER III. 

THE INVESTMENT OF SAVINGS AT 
TIMES OF DEPRESSION. 



EXPLANATION OF THE CHART. 

BEFORE inquiring into the nature of the peculiar 
class of investments mentioned in the title of this 
chapter, let us broadly define what constitutes an invest- 
ment as such, and what changes cash funds have to 
undergo before they become invested. 

To this end let us conceive the country's money sup- 
ply to be divided into two classes: "Active Money" on 
the one hand, as represented by the Red Ring of the 
Chart, and "Surplus Funds" on the other, the latter con- 
stituting the "Money Market," the central field of the 
Chart. 

The first class, Active Money, comprises by far the 
greatest part of the money wealth, viz., all that is em- 
ployed in industry and trade, wage funds, people's earn- 
ings so far as intended to be expended for consumpt- 
ibles, and all funds held by business men for purposes of 
regular current business.* 

The second class, Surplus Funds, comprises such 
funds as are not engaged in carrying on regular current 
business, but are idle, and available for investment. 
These funds originate principally from the surplus earn- 
ings of the savers (represented in the Chart by the red 
savings lines 10 and 11, which build up the central field) ; 

* Such funds may be temporarily idle; but inasmuch as the owner 
cannot afford to invest them elsewhere, and will sooner or later need 
them again for his regular business, they belong in the class of 
Active Money, i. e., in the red ring of the Chart. 



The Investment of Savings at Times of Depression. 35 

to a small extent also from the increase of artificial 
money issued by the commercial banks, such as bank 
notes and bank credits; which increase is represented in 
the Chart by the red-and-black line No. 18. 

We should keep this distinction between Surplus 
Funds (black central field) and Active Money (red ring) 
well before us in order to answer the above-stated ques- 
tion as to what constitutes an investment. The latter 
necessitates the transformation of Surplus Funds into 
Active Money. 

While the act of saving generally withdraws Active 
Money from the channels of industry and trade and 
turns it into the Money Market, the act of investment 
will turn it back from the Money Market into the chan- 
nels of industry and trade. In terms of the Chart : while 
the red savings lines emanating from the "Income Field" 
transmit cash from the ring to the centre, transforming 
it from "Active Money" into "Surplus Funds," the 
black investment lines emanating from the central field 
carry it back from there to the ring — from the unpro- 
ductive circulation of the Money Market into the pro- 
ductive circulation of industry and trade. They trans- 
form "Surplus Funds" into "Active Money." 

This transformation constitutes a vital condition of 
an investment. Surplus Funds, in order to be invested, 
must cease to be "funds available for investment." 
Merely changing the ownership of such funds does not 
invest them; for instance, in buying a house. But the 
building of a house does. A thousand dollars, if spent in 
building or creating any kind of property, will be scat- 
tered into many hands, will generally be turned into in- 
come for the direct or indirect receivers, and will cease 
to be cash capital. This scattering of the compact money 
mass — the return of the money into the channels of in- 
dustry and trade for purposes of production or consump- 



36 The Investment of Savings 

tion — that is what constitutes the essential feature of an 
investment. Without this scattering of the cash funds no 
investment takes place. 

Of such investment lines our Chart shows quite a 
number, each one denoting a separate and distinct class 
of investment. Of the red savings lines, which emanate 
from the "Income Field," the Chart shows only two. 
"Replacement Savings" and "Net Savings," the dis- 
tinction between these two classes being based on the 
manner of investment — whether the savings are avail- 
able for increasing the country's wealth and for creating 
new productive capital, or whether they are absorbed in 
merely keeping up the standard of the capital already in 
existence and in making up for deterioration and losses. 
In other words, the distinction as to whether they must 
be classed as Replacement Savings or as Net Savings de- 
pends upon the outlet from the Money Market, whether 
they find it by means of Lines 12, 13 and 14, or by means 
of Lines 15, 16 and 17. 

LINE No. 10 represents "Replacement Savings," i. e., such 
savings as are absorbed in maintaining the standard 
and efficiency of existing capital, property, or wealth. 
The manner of their absorption is shown by the in- 
vestment lines 12, 13 and 14. Line No. 12 stands for 
"Losing Enterprises," where cash capital is sunk in 
injudicious or fruitless undertakings; the accumula- 
tion of such cash capital (or eventually the subse- 
quent replacement of it) evidently absorbing savings. 
Line No. 13 stands for "squandering"; a spendthrift 
may sell his house and squander the proceeds, while 
the man who supplies the money and takes the house 
for it, finds investment for his savings. Inasmuch as 
the spendthrift expends his money for consumptibles, 
he transforms "Surplus Funds," the savings of 
others, into "Purchase Money." a process which can 
be followed on the Chart. Line No. 14 stands for 
"Repairs and Renewals," such as are necessitated in 



at Times of Depression. 37 

consequence of wear and tear, the ravages of time, 
accidents, conflagrations, floods, storms, etc. 

It is plain that out of the total of savings accruing, a 
certain part is required to make good the losses result- 
ing from the causes enumerated above; and this part of 
the savings is represented separately in the Chart, by the 
red line No. 10 — Replacement Savings. 

LINE No. 11 represents "Net Savings"; i. e., such sav- 
ings as are not absorbed by any of the factors just 
alluded to, and which are therefore available for new 
constructions and for the augmentation of wealth. 
The manner of their absorption is shown by the in- 
vestment lines 15 A, 15B, 15C, 16 and 17. 

As will be noticed, Line No. 11 divides into two 
branches, one of them being designated as "No. 11 B. 
Capitalistic Savings," the other as "No. 11 C, Excess 
Savings," this distinction indicating the difference in the 
final results whch the savings lead to. The fact is that 
while all "Net Savings," as represented by Line No. 11. 
are available for the augmentation of the country's 
wealth, only a part of them really comes to be employed 
for that purpose, which part is represented by the branch 
of Line No. 11 designated as "Capitalistic Savings;" 
while the other part, designated as "Excess Savings," is 
not so employed. The mode of investment of these two 
sub-divisions of "Net Savings," therefore, is quite dif- 
ferent, which difference can be traced in the Chart, as 
follows : 

"CAPITALISTIC" SAVINGS (No. 11 B) are, as stated, 
those which lead to the creation of new capital 2 or 
wealth, finding their avenues of investment through 
the lines 15 A, 15 B, 15 C and 16. Line 15 A stands 
for cash funds moving into mercantile enterprises, 
increasing the "circulating capital" by opening new 
commercial establishments and extending old ones. 
Line 15 B stands for cash funds which are being em- 



38 The Investment of Savings 

ployed in the extension of transportation facilities, 
such as railroads, ships, roads, canals, etc. Line 15 C 
stands for cash funds in course of conversion into new 
productive enterprises, especially manufacturing, 
mining, and agriculture; also tenement houses, etc. 
Line 16 stands for cash funds being invested in what 
may be termed "non-productive capital," such as 
hospitals, public schools, municipal buildings, parks, 
houses occupied by the owners, pictures, libraries, etc. 

"EXCESS" SAVINGS (Line 11 C) constitute that part 
of the "Net Savings" which, though available for 
new enterprises, or for the creation of new wealth, do 
not find an outlet in that direction. Their avenue of 
investment is represented in the Chart by Line No. 
17, "Impair Investments." Their peculiar manner of 
investment has never been explained so far, and will 
be the subject of the present chapter. 

On the last page of the Chart will be found Diagrams 
1, 2 and 3, the purport of which is fully covered by the 
accompanying text. These diagrams will be referred to 
in this treatise as occasion demands. 

IMPAIR INVESTMENTS. 

Savings 1 generally flow to the money market, where 
they seek investment — a process which has been illus- 
trated by the red lines of our Chart. These savings, so 
far as they are not absorbed for "Replacement" pur- 
poses, are available for the creation of new capital or 
wealth. In, times of depression, however, this, their nat- 
ural field of investment, becomes quite limited, and will 
no longer absorb all the funds available for that pur- 
pose. Then a part of these funds is left over. The part 
thus remaining has been designated in the foregoing 
pages as "Excess Savings." 

These Excess Savings should be expected to accumu- 
late in the money market; as a matter of fact, however, 
they do not. They evidently find some outlet from there, 



at Times of Depression. 39 

almost as readily as if absorbed in new enterprises. How 
this is done, nobody knows. They are, no doubt, turned 
into capital 2 , but a corresponding creation of new capi- 
tal does not take place. 

The explanations so far given by our economists to 
account for this strange phenomenon have proved to be 
untenable — a conclusion which has been fully demon- 
strated in the previous chapter. 

******** 

To present the subject at issue in a form more readily 
understood, let us resort to figures, and to this end re- 
produce the equations given on page 13, which show 
how savings are affected and investments changed in 
their character by the recurring seasons of prosperity 
and depression. The changes thus brought about can 
also be followed up in Diagrams 1 and 2, which see. 

MANNER OF INVESTING SAVINGS AT A TIME OF PROSPERITY. 

(See Diagram 1) 

Dollars 
Annual savings available for the creation of new capital 

(the "Net Savings" of the Chart) 3 billions 

Savings actually invested in new constructions3 (the 

"Capitalistic Savings" of the Chart) nearly 3 billions 

Savings left over (the "Excess Savings" of the Chart).. Nominal 

MANNER OF INVESTING AT A TIME OF DEPRESSION. 

(See Diagram 2) 

Dollars 

Annual savings available for the creation of new capital 
(Net Savings), as assumed on page 13, — the saving 
power of the people having been cut down by one 
billion, owing to a diminution of income 2 billions 

Of which amount only a part is actually invested in new 
constructions (said part representing the Capitalistic 
Savings), say 1 billion 

Leaving an amount of "Excess Savings," the mode of in- 
vestment of which is not known, of 1 billion 

Whether this last figure, representing the "Excess 
Savings," should be exactly one billion, or a different 
amount, does not matter. In any event the amount of 
savings not invested in the creation of new wealth is 
quite large at times of depression — a fact which econo- 
mists will hardly dispute. 



40 The Investment of Savings 

From the above figures, rough as they are, a conclu- 
sion can. be drawn which will throw a peculiar light on 
the mjode of investment of the funds in question. Inas- 
much as the saving process enriches the savers, increas- 
ing their aggregate wealth by two billion dollars, and 
inasmuch as the aggregate wealth of the country as a 
whole increases only by one billion, the acquisition of 
wealth on the part of the savers must be accompanied by 
impoverishment 9 on the part of other members of the 
community. In other words: If Net Savings are not in- 
vested so as to augment the country's wealth or capital, 
and if they find their final investment in some other way, 
they will, though benefiting the saver, do so only at the 
expense of ' ' others. ' ' The savers will become richer ; 
"others" poorer. 

To render this point still more clear, let us again re- 
sort to figures. Let us assume the wealth of the country 
to amount to 100 billion dollars, of which one half is 
owned by the savers, the other half by non-savers: and 
let us ascertain how the holdings of the latter class 
(which class, by the way, represents the great mass of 
the people) are affected by the saving process in a year 
of prosperity and how they are affected in a year of de- 
pression. 

CHANGES OF WEALTH IN A YEAR OF PROSPERITY. 

Dollars 

Jan. 1st. Property held by the savers 50 billions 

Property held by the non-savers 50 billions 

Total holdings 100 billions 

Dec. 31st. Total holdings, the saving process having 

added 3 billions of new capital 103 billions 

Of which amount the savers own 53 billions 

Leaving for the non-savers, the same as at the 
beginning of the year 50 billions 

CHANGES OF WEALTH IN A YEAR OF DEPRESSION. 

Dollars 
Jan. 1st. Total holdings, same starting figures as above. 

aggregating 1°° billions 



at Times of Depression. 41 



Dec. 31st. Total holdings — only one billion of savings, out 
of a total of two billions, having been used 
for building up new constructions 101 billions 

Of which amount the severs own, having aug- 
mented their holdings by two billions 52 billions 

Leaving for the non-savers, instead of 50 bil- 
lions as at the beginning of the year, only. . 49 billions 



Here the non-savers, representing the bulk of the 
community, have become poorer by one billion as a se- 
quel to the fact that savings to that amount, made by 
others, failed to be invested in the creation of new 
wealth,* but were invested in some other way. Granting 
the fact that at times of depression there are more sav- 
ings made than can, for the time being, find investment 
towards increasing the community's wealth, it follows 
with certainty, from the above calculation, that the body 
of non-savers must become poorer to the full extent of 
the savings not so employed ; i. e., to the full amount of 
the "Excess Savings." 

A great deal, therefore, depends upon the manner of 
investment, as to whether it leads to the creation of new 
wealth, or not. In the one case the community is bene- 
fited ; in the other, a part of it suffers a certain impov- 
erishment. 9 To distinguish these two kinds of invest- 



* The above calculation, which forms the basis of my saving- 
theory, will, in the subsequent parts of this treatise, be referred to 
as the "Basic Calculation." 

To economists this calculation may, at first sight, seem to be 
erroneous, and the impression may prevail that if the savers become 
richer by 2 billions, the community must also become richer by that 
much. That this does not necessarily follow, is proved, however, by 
the well known squandering process. The spendthrift who sells his 
house and spends the proceeds, becomes poorer; the saver who sup- 
plies him with the money and takes the house for it, becomes richer. 
So the enrichment of the latter is offset by the impoverishment9 of 
somebody else, and is not accompanied by an increase in the aggre- 
gate wealth of the community. The savings are invested, but with- 
out the creation of new capital2. 

Just so in the case covered by our calculation: the investment of 
the one billion of "Excess Savings" does not augment the wealth of 
the community, but hinges on the acquisition, by the savers or their 
representatives, of property already existing, in connection with the 
impoverishment of its previous owner. 

The causes of the impoverishmento are radically different, how- 
ever, in the two cases here cited. It is brought about by the volun- 
tary doings of the individual in the one instance, and in the other 
by general market conditions entirely beyond the individual's con- 
trol. 



42 The Investment of Savings 

ment, let us designate the one as "Capitalistic (i. e. 
capital-producing-) Investments," linking with the 
"Capitalistic Savings" spoken of on page 37, the other 
as "Impair Investments" 8 — the latter term having been 
used on page 38, as well as in the Chart. Of these two 
forms of investment the first one is well known to the 
reader and needs no discussion; so we may confine our- 
selves to the investigation of the second, the "Impairing 
Form of Investment" (i. e., the investment of Excess 
Savings), and above all enquire into the nature of the 
impoverishment caused by it. To this end I shall take 
up three questions which naturally present themselves in 
connection with the subject, viz. : 

1st Is the impoverishment, 9 as evinced by the aforesaid 
"Basic Calculation," merely a matter of calculation 
based on assumed figures, or is it proved by actual 
facts? 

2d. If a matter of fact, how is it brought about? What 
is the modus operandi? 

3rd. What has the impoverishment 9 of the community to 
do with the investment of "Excess Savings"? 

Let us take up each of these questions separately. 



QUESTION NO. 1. — Is there much impoverishment 9 
going on among the people at a time of depression? 

There certainly is. In fact, that is one of the princi- 
pal features of a depression. Anywhere and everywhere 
we meet people who complain of reduced earnings, of 
poor business, of their inability to make both ends meet. 
All over we find men out of employment, or working 
only part of the time, and struggling hard to procure 
even the most urgent necessaries of life — business men 
running behind, and property-owners being compelled to 
encumber their holdings. Wherever people do not enjoy 
a fixed income ; wherever their earnings depend upon the 



at Times of Depression. 43 



course of business; and wherever they do not belong to 
the favored few who are well to do and who still can 
save and accumulate, there we find wealth waning and 
poverty spreading. 

The "Basic Calculation," therefore, agrees with the 
facts. And in turn, the facts prove the correctness of 
our calculation — at least so far as the underlying prin- 
ciple is concerned. 

QUESTION NO. 2. — How is this impoverishment 9 
brought about ? 

We can readily trace the cause when considering the 
fact that at times of depression but little new capital 2 
is being built up and that most of the "working forces" 6 
ordinarily engaged in new constructions are thrown out 
of emp^yment. These "Constructive" Forces comprise 
not only the workmen immediately concerned, but also 
manufacturers, contractors, dealers, the men engaged in 
transportation and in the production of raw material, 
etc., all of whom find their income either stopped or re- 
duced and accordingly become poorer. Let us designate 
these people in their entirety as "Class C"*. 

As soon as Class C commences to suffer from the im- 
poverishment process caused by the lull in new construc- 
tions, a new element of disturbance, which we will call 
the "Multiplying Principle," comes into play, aggravat- 
ing the harmful effect. The impoverishment is not con- 
fined to Class C, i. e. to the Constructive Forces, 7 but 
will spread further. The individuals constituting that 
class, finding their income stopped or reduced, have to 
reduce their expenses accordingly. They will buy less of 

* The individual members of class C, or any other class, are af- 
fected to a very uneven extent; the one member, a workingman, may 
lose all of his income; another member, a merchant, only a small 
part of it. A merchant may be a member of each of a good many 
classes. 



44 The Investment of Savings 

commodities than before. In consequence of that, the 
producers and distributers of such commodities as class 
C had been buying, will likewise be affected, the demand 
for these goods falling off. Withal the production of 
these commodities will be reduced; and, as a further se- 
quence, the earnings of the producers will decline. So 
the harmful effect is not limited to the members of class 

C, the Constructive Forces, but will extend further, mul- 
tiply as it were, and reach those engaged in the produc- 
tion of commodities, i.e. the "Commodity Working 
Forces. ' ' 7 

To illustrate this matter by an example, let us single 
out ten working men, forming part of class C, and as- 
sume that, when employed, their aggregate earnings 
amount to $5,000 per annum. They spend that money in 
the purchase of commodities. When these commodities 
are produced anew, that money will become income for 
those who are engaged in reproducing them. Let us 
designate these producers (including the distributers). 
so far as they are directly affected by the purchases of 
those ten men, as "Class D " When the members of class 

D, in turn, expend their earnings, that same money be- 
comes income for class E, and so on for classes F, G, etc.. 
the succession of income and expenditure forming prac- 
tically an endless chain. Now cut off the income of those 
ten men in class C, and the whole chain will be affected. 
The expenditures of class C may be reduced from $5,000 
to $1,000,* thus diminishing the income of class D by 

* The members of class C surely do not reduce their expenditures 
to nothing, for they do not exactly starve with their families and are 
not left without food and clothing and shelter, but will manage, by 
hook or. crook, to obtain the most urgent necessaries of life. If they 
have an account at the sevings bank, they will draw against it. If 
they have furniture which they can spare, or other kind of property 
they can dispose of, they will sell it. They will leave the rent unpaid, 
and thus pirate on the landlord; or they may pirate on their friends, 
by borrowing from them. Eventually they will appeal to the charity 
of others On the whole, our assumption that if they lose their reg- 
ular income of $5,000, they still will expend $1,000, may not be far 
from the truth. 



at Tunes of Depression. 45 

$4,000; which means a total loss of income of $9,000 to 
the two classes combined. The income of class E may 
decline to the extent of $2,000 or $3,000, which brings 
the total loss up to $11,000 or $12,000. This total will 
keep on swelling as the harmful effect spreads further. 
True, for each successive link of the chain the loss be- 
comes smaller, being divided up, at the same time, among 
a greater number of individuals.* Still, the losses are 
there, and, whether light or heavy, they are felt by all 
classes affected, and in their aggregate represent a much 
larger amount than the original loss of $5,000 which be- 
fell class C. Here we have an illustration of the modus 
operandi of the "Multiplying Principle." 

To form an estimate of the extent to which the in- 
come of the community at large can be affected by the 
factors here discussed, we must recall the figures given 
in the early part of this chapter. Let us retain the as- 
sumption that while during the prosperous period of 1907 
the total surplus earnings of the people amounted to 3 
billion dollars per annum and were fully absorbed in the 
creation of new wealth, the amount shrank to 2 billions 
after the depression set in, out of which sum only 1 bil- 
lion is being absorbed in the creation of new wealth, 
instead of 3 billions as before. Then two-thirds of the 
"Constructive Working Forces," 7 i.e. two-thirds of the 
individuals constituting class C, will be put to idleness, 
and will lose income to the amount of 2 billion dollars 
per annum. This loss of income on the part of class C 
will entail a loss of income on the part of class D, of 
probably not less than one and a half billion. The loss 
to class E will be less than that, and still less will be the 
respective losses to classes F, G, etc. If we put down 



* If class C counts 10 members, class D (i. e. those who are di- 
rectly affected by the purchases of class C and derive income there- 
from) may count 1,000 members; class B (those who derive income 
from the purchases of class D) 5,000 members, class F 10,000, and 
so on. 



46 The Investment of Savings 

another billion and a half as the aggregate loss of all the 
other groups, a figure which may not be too high, the 
grand total of the annihilation of earnings would be 
brought up to 5 billion dollars per annum If we com- 
pare this sum with the amount of the aggregate actual 
earnings, which has been computed at over 20 billions 
per annum, we find that one-fourth of the former income 
of the people may thus be annihilated. This would be 
the outcome if earnings to the amount of one billion dol- 
lars were invested in the "Impairing Form" 8 ; i.e., if 
they did not lead to the creation of new wealth. 

The above-stated proportion of one-fourth may seem 
excessive. Whether the annihilation of income be put 
down as a fourth, or only as a fifth, or a sixth of the 
total, does not matter much. My object is not to estab 
lish exact proportions, but to bring out the general prin- 
ciple and to show that an interruption in the process of 
building up new capital 2 , even a partial one, forms in 
itself a factor of disturbance potent enough to bring 
about, to the full extent, those harmful effects which are 
being witnessed in a period of depression. 

How widely the two forms of investment will differ 
in their bearing upon the welfare of the commonwealth, 
may become apparent from the following comparison: 

One billion dollars of savings 1 , if invested 
in building up new capital 2 , will aug- 
ment the country's wealth by $1,000,000,000 

One billion dollars of savings, if invested 
in the "Impairing Form," will not aug- 
ment the country's wealth, but will, 
according to the figuring above, an- 
nihilate the income of the community 
to the extent of $5,000,000,000 

These two modes of investment, the Capitalistic and 
the Impairing — the one enriching the community, the 



at Times of Depression. 47 

other impoverishing it — may seem to counteract and ex- 
clude each other; yet they are both in action at one and 
the same time, especially in periods of depression, and 
go very well together. There may be a billion dollars in- 
vested in the Capitalistic Form and create new capitaP 
to that amount, at the same time when another billion 
dollars is being invested in the Impairing Form, annihi- 
lating income on the part of the people to perhaps five 
times that amount. 



QUESTION NO. 3. — Does the impoverishment of 
the community help the savers to find investment for 
their " Excess Savings"? 

It does. Excess Savings are invested, not in the cre- 
ation of new capital, but in the acquisition of capital 2 
already existing, such as the owners have to let go, ow- 
ing to impoverishment; to a large extent, also, by mak- 
ing loans on such property, or loans to such business 
men as find themselves running behind. 

As already stated, this process of impoverishment 9 , 
which forms such a conspicuous feature in a depression, 
does not confine itself to reducing workingmen and the 
poorer classes to a state of privation; it will also en- 
croach upon the wealthy, such as own property which 
they may realize on 10 when they can no longer defray 
their expenses out of their diminishing income. This 
process of impoverishment, therefore, will manifest itself 
in two distinct forms: on the one hand in the shape of 
privation on the part of those affected, resulting in a 
lowering of their standard of life; on the other hand in 
the shape of alienation of property. 10 These two forms 
of impoverishment should be kept well apart. Making a 
guess as to the relative proportion of these two kinds of 
hardship, I would say that out of a total loss of income 
of 5 billions due to the depression and to the lack of de- 



48 The Investment of Savings 

m'and, there may be 4 billions represented by privation, 
and 1 billion by alienation of property.* It is the latter 
form of impoverishment, the loss of capital goods, which 
the "Basic Calculation" refers to in the early part of 
this chapter, when pointing out that a billion dollars of 
savings, if invested in a different way than in the creation 
of new wealth, would impoverish the non-savers of the 
community to the like amount of one billion. But this loss 
of capital goods to the amount of one billion is generally 
coupled with a good deal of privation, which, if ex- 
pressed in money value, would represent a much larger 
amount. For instance, a man may lose income to the 
amount of $3,000 and may, in consequence, alienate prop- 
erty worth $1,000, 10 the loss of the remaining $2,000 be- 
ing met by privation. 

Strictly speaking, he would thus become poorer not 
by $3,000 but by $1,000. It is only the latter figure, viz. : 
the amount represented by the alienation of property 10 , 
which counts towards absorbing "Excess Savings." In 
proportion as such property is thrown upon the market. 
Excess Savings come to be invested, generally through 
the medium of some financial institution. In the pur- 
chase of such property practically all savings funds, so 
far as available for, but not used in, the creation of new 
wealth, find their outlet from the money market at times 
of depression. When they do, they are being spent by 
the receivers of the money in defraying their living ex- 
penses, and in consequence they re-enter the channels of 
trade and industry and are transformed into goods again. 
As soon as Excess Savings, say to the amount of $1,000, 
re-enter these channels, the harmful action caused by the 

* The above proportion of 1 to 5 between "alienation of prop- 
erty"io on the one hand and "loss of income" on the other, is identi- 
cal with the proportion I arrived at on page 46 as obtaining between 
"Excess Savings" and "loss of income." Excess Savings are equiva- 
lent in amount with the alienationio of property caused by the in- 
vestment of such Excess Savings, so both of these factors stand in 
the same proportion to the third factor, "loss of income." 



at Times of Depression. 49 

fact that that individual block of a thousand dollars of 
Excess Savings failed to be invested in the creation of 
new wealth, will come to an end and will not spread any- 
further. 

Excess Savings will not return into the channels of 
trade and industry until an equivalent alienation 10 of 
property on the part of non-savers has taken place, 
•*1,000 of property against $1,000 of savings; and the im- 
poverishment, the loss of income, forms the whip which 
enforces that alienation. The sooner this alienation is 
attained, the less need is there for the application of the 
whip, and the smaller is the harm brought upon the com- 
munity; on the other hand, the harder people fight 
against the alienation of their property, and the more 
they meet the loss of income by privation, the fiercer will 
be the lash of the whip, and the greater the distress.* 
The more privation, the greater will be the curtailment 
of the demand, of consumption, and of production, and 

* Let us illustrate the above by an example. Suppose a merchant 
has "run behind" to the amount of $1,000 in a year of depression, but 
withal has not reduced his business or household expenses any, mak- 
ing up for the deficiency by means of a loan. Such a loan, as ex- 
plained before, counts the same towards absorbing Excess Savings 
as would an equivalent alienation of property. Here we have a case 
where the loss of income is not met by privation. Therefore the 
merchant's loss of $1,000 entails no diminution of the general demand 
and, consequently, no loss of income to others. The two factors in 
question, "loss of income" on the one hand and "alienation of prop- 
erty"io on the other, are coupled right in the same link of the chain 
and, in consequence, a multiplication of that loss of income does not 
take place. Now suppose the merchant acts differently, and, having 
anticipated a poor year, reduces his household expenses from the be- 
ginning, so as to economize $1,000 in that year. Then he meets that 
loss of income of $1,000 by privation to the like amount, not by 
alienation of property as assumed before. His economizing will re- 
duce the general demand for commodities by $1,000; therewith pro- 
duction; and therewith the income of others. Then the loss of in- 
come sustained by these "others" will be at least $1,000 in addition 
to his own loss; but most likely those "others" will economize, too, 
and if so, the damage will spread from one link of the chain to the 
other, and may easily aggregate $5. 000, or more, before the individuals 
constituting the various links of the chain have, in their entirety 
sacrificed property enough to clear that amount of $1,000, or until 
they have become indebted that much. 

The proportion between the two factors, "alienation of property" 
(equivalent to Excess Savings) on the one hand and "loss of income" 
on the other, stands as 1 to 1 in the first instance, and as 1 to 5 in 
the second — bearing out the statement made in the text that, the 
more the shrinkage of income on the part of individuals is met by 
privation, the more will that shrinkage of income multiply by spread- 
ing among other members of the community. 



50 The Investment of Savings 

therewith of income. That whip of impoverishment will 
lead to both, privation as well as alienation of property; 
but it is only the latter which offers a bridge for Excess 
Savings to be invested and which thereby makes the lat- 
ter return into the channels of industry and trade. Until 
they do return into these channels, the whip will remain 
in action, impoverishment will spread, and incomes will 
shrink. 

The conclusion arrived at in the foregoing discussion, 
that Excess Savings meet their investment by the mere 
purchase of capital goods already existing, may seem to 
come in conflict with an assertion made in the preceding 
chapter. In the reply to Explanation No. 8, page 28, I 
stated that the mere purchase of capital already exist- 
ing, or the mere loaning out of funds on mortgage, etc.. 
would simply shift the funds from the possession of one 
man to that of another, say from A to B, but would not. 
constitute an investment of the funds as such the latter 
remaining idle, investment-seeking cash capital, now as 
before. While this is true where the sale is consummated 
as a matter of regular business, and where B intends to 
use the money subsequently for business purposes, i. e. 
for some enterprise, the situation is entirely changed if, 
as a new factor, the impoverishment 9 process comes into 
play. If B sells a bond, not for business purposes but 
because he needs the proceeds to defray his living ex- 
penses, then the purchase money ceases to be cash capi- 
tal and leaves the money market without going through 
the process of a further investment^ so that practically 
the real and final investment of that cash capital 
is formed by the purchase of the bond. To emphasize 
this point, I repeat: 

Whenever capital goods are sold, and the seller uses the 
funds (i. e., the proceeds) for business purposes, these 
funds find their real and final investment when ap- 



at Times of Depression. 51 

plied to such business purposes. The mere sale or 
purchase of property does not then constitute an in- 
vestment of the funds as such. 

Whenever capital goods are sold, and the seller expends 
the proceeds for living expenses, then the purchase 
of the property constitutes the real and final invest- 
ment of the funds thus changing hands. 

What is said here of cash funds in general, refers 
specifically to cash funds accruing from savings or sur- 
plus earnings. The latter may be invested without a 
creation of new wealth, simply by the purchase of capi- 
tal 2 already existing, provided a concurrent impoverish- 
ment 9 of the owners of that capital takes place. Other- 
wise the transaction does not constitute an investment. 

Let us illustrate this point still further by an exam- 
ple. Suppose a wage earner, H, loses his position and 
therewith his income. He owns a house, worth say $5,000. 
From his friend A, a saver, he borrows some money 
which he uses for his living expenses; and when through 
with it he borrows again, paying interest accordingly. 
After running his debt up to $1,000, he gives A a mort- 
gage on the house ; which mortgage is subsequently in- 
creased to $2,000 and to $3,000, in proportion as his in- 
debtedness grows. H may find employment again after 
that. But the debt remains, and constitutes a profitable, 
interest-bearing investment for A's savings. Here we 
have a plain case showing how savings can be employed 
without the creation of new capital goods; also, how the 
impoverishment of the non-savers actually forms the 
basis of the investment, opening up, as it were, a new 
field for investments, just at a time when depression pre- 
vails and when poverty is spreading, and when the 
regular field of investment narrows down. The example 
also explains the mysterious disappearance of the sav- 
ings funds from the money market at times of depres- 
sion : Had the mortgage been given for business pur- 



52 The Investment of Savings 

poses, there would be a cash capital of $3,000 in H's 
hands to show for it; or, eventually, there would be a 
new construction of some kind to show for the cash cap- 
ital, in case II invested it. In the case covered by our 
example, however, there will be no available cash capital 
of $3,000 when H issues the mortgage, most of the money 
having already been spent by him, and no new property 
having been created with the aid of it. The funds grad- 
ually disappeared from the money market without lead- 
ing to any visible result- -just as we see it in real life. 

It is in the acquisition of property which the owners 
cannot hold, that Excess Savings find their final invest- 
ment; either directly, by outright purchase, or indirect- 
ly, by acquiring a title to or a lien on such property, say in 
the shape of a mortgage or of a common loan. The char- 
acteristic feature of the investment of Excess Savings is 
the Change of Possession of property (capital goods) al- 
ready existing, in conjunction with the involuntary im- 
poverishment of the previous owner. This kind of in- 
vestment is going on, to a small extent, even at prosper- 
ous times; but it grows in extent as business relaxes, and 
at times of serious depression will actually be the pre- 
dominating: form of investment. 



Let us recapitulate the three queries raised in the 
early part of this chapter in connection with the ''Basic 
Calculation" and in connection with the process of im- 
poverishment 9 which that calculation reveals. Our first 
query was, whether such impoverishment really exists, 
at times of depression. No economist will seriously at- 
tempt to deny that it does. Second query : How is that 
impoverishment brought about? By lack of employment 
and lack of earnings. At times of depression but little 
in the line of new constructions is being built up, in con- 
sequence of which fact the Constructive Working 



at Times of Depression. 53 

Forces, 7 which I designated as class C, are largely put to 
idleness and are thus deprived of their earnings. This 
enforced idleness will spread further, reacting on the 
"Commodity Working Forces" D, E, F, etc., engaged in 
production and trade, and will reduce their income also, 
thus bringing about a multiplication of the annihilation 
of income, aggregating perhaps five times the original 
loss sustained by the forces C. This annihilation of in- 
come will, on the one hand, lead to more or less privation 
on the part of the classes C, D, Ji, F, etc. ; on the other 
hand to alienation of property 10 on the part of the 
wealthy members of these classes. Third query: Does 
this annihilation of income, and the consequent impov- 
erishment of a large part of the community, help the 
savers to find investment for their surplus earnings, 
such as are not absorbed in the creation of new wealth? 
It does. This class of surplus earnings finds its invest- 
ment in the purchase of property or capital goods which 
the owners are compelled to alienate 10 as a sequence of 
that impoverishment. Without the impoverishment there 
would be no such forced alienation of property, and 
without the latter there would not be the opportunities 
for investing "Excess Savings." 

Economists will not dispute that now and then the 
impoverishment of the one individual will enable the 
other to invest his savings by merely purchasing prop- 
erty already existing. They may also admit that such 
cases occur more frequently in seasons of depression, 
where incomes shrink and where the impoverishment 
process becomes more pronounced. But to admit that 
this impoverishment process should go far enough to ab- 
sorb practically all surplus income that is not absorbed 
in the creation of new wealth; and that, moreover, the 
impoverishment should be a matter of inherent necessity 



54 The Investment of Savings at Times of Depression. 

in order to provide investment for that class of surplus 
income — to admit that, would he almost impossible for 
our economists, unless they thoroughly remodel the ac- 
cepted theories on the subject of saving. Still, it is hard 
to avoid those conclusions, which coincide with the con- 
clusion arrived at in the "Basic Calculation" given on 
page 40, viz. : if the savers become richer and the total 
wealth of the community does not increase to an equal 
extent, the non-savers must become poorer, and either 
must give up property or become indebted, to the full 
amount of the "Excess Savings." 



In the foregoing pages it has been shown how a de- 
ficiency of the demand is created in the interval between 
the act of saving and the act of investment, provided the 
latter takes place in the Impairing Form 8 — a deficiency 
which is never compensated for by the act of investment. 
The conclusions arrived at may seem to run counter to a 
well-established axiom of modern economics, That the 
shortage of the demand originally caused by the act of 
saving is always compensated for by the act of invest- 
ment, provided the savings funds finally come to be ex- 
pended for goods or services in the course of such in- 
vestment. Whether this axiom can stand scrutiny or not, 
will be discussed in a subsequent chapter. For the pres- 
ent let us bear in mind that much depends upon the 
manner in which the savings funds come into the posses- 
sion of the individuals who expend them for commodities 
and thus turn them into goods again — whether in the 
shape of income, in payment for services rendered, or 
whether over the bridge of their own impoverishment, in 
the shape of loans, or as the proceeds of property which 
they were compelled to alienate or realize on. 



CHAPTER IV. 

VARIOUS DEPRESSION THEORIES. 

IN the preceding chapters the cause of depressions has 
been connected with a relaxation in the process of 
building up new capital. 2 That such a relaxation actually 
sets in concurrently with the beginning of a depression 
is generally admitted by economists; and it is also under- 
stood that as a consequence the working forces ordi- 
narily engaged in said process are largely reduced to 
idleness — also that this forced idleness reacts upon those 
engaged in the broad lines of production and upon busi- 
ness in general, thus aggravating the ill effects originally 
caused by the subsidence of new undertakings. But 
while this slackening of new constructions is well known 
to be the immediate cause of depressions, it is also well 
understood not to be the primary cause, being itself a 
sequence of causes still more remote. The nature of the 
real, the primary cause, has been a subject of much dis- 
cussion among economists, many theories being extant to 
explain the origin of that lull in new constructions. Let 
us review some of these theories. 

DEPRESSION THEORY NO. 1. 

(LACK OF FUNDS.) 

The fact that a dearth of cash capital, when becoming 
acute, is likely to engender a crisis, and will always form 
a conspicuous feature of the crisis proper after it once 
sets in, has led many economists to believe that the de- 
pression following a crisis must likewise be attributed to 
that cause, i. e., to the lack of funds. This view has been 
discussed at some length in Chapter I, where I have 



56 Various Depression Theories. 

pointed out that though a dearth of cash capital will 
often engender a crisis and serve to usher in the subse- 
quent depression, it can not be the cause of the con- 
tinuance of the latter, inasmuch as we generally do not 
find a scarcity of cash capital after the depression has 
properly developed and passed the primary stage. The 
obvious fact that some other and more powerful element 
must intervene to give continuity to the depression, since 
the primary factor — the dearth of cash capital — is no 
longer active, this fact should conclusively disprove the 
"lack-of- funds" theory, provided we are looking for the 
inherent cause of the depression, and not merely for the 
origin of the crisis. On the other hand, such an array, of 
brilliant arguments has been brought forward in support 
of the lack-of-funds theory, arguments which may seem 
largely to controvert my own conclusions, that I deem it 
best to take up some of them and expose their fallacy. 

Almost all of these arguments lose sight of an import- 
ant point, namely, that productive capital 2 can not for- 
ever go on increasing. The most natural explanation of 
the cause of depressions, such as would readily occur to 
a business man, would probably be this: "Productive 
capital can not keep on growing forever; it can expand 
only in proportion as the demand for the products of cap- 
ital expands, and this demand is almost always lagging 
behind. The growth of productive capital, therefore, is 
checked because the demand cannot follow/' 

This explanation, however, has not found much favor 
among economists, their views trending rather in the op- 
posite direction. Most of them prefer to attribute the 
check in the formation of productive capital, not to the 
superabundance of capital 2 already in existence, but to 
the shortage of liquid capital such as is necessary to build 
up still more of it. Their chief arguments may be summed 
up in the following four points : 



Various Depression Theories. 57 

ARGUMENT NO. 1.— The alleged superabundance of 
productive capital has existed in the past pretty much 
the same as it does today. As this superabundance 
heretofore did not hinder the growth of productive 
capital, there is no reason why it should do so at pres- 
ent, or in the future. Going by the experience of the 
past we must conclude that in spite of that super- 
abundance of productive capital there is always room 
for more. 

ARGUMENT NO. 2.— The expansion of productive capi- 
tal is to a certain extent self-sustaining. The more 
capital there is, the greater the general demand; and 
in turn, the more the demand grows, the greater the 
need of productive capital. 

ARGUMENT NO. 3. — Whenever the investment process 
relaxes, the cause thereof must be due to either one of 
two alternatives, either to a lack of opportunities for 
profitable investment, or to a lack of savings funds 
to be invested. Which of these two causes is the pre- 
dominating one? If it were the former, i. e., if the 
opportunities for investment were wanting, the sav- 
ings funds would accumulate in the money market in 
the shape of huge idle cash funds, which as we know 
is not the case. The cause of the relaxation, there- 
fore, must be due to the other alternative, i. e., to the 
lack of savings funds available for investment — a 
conclusion fully corroborated by the fact that savings 
almost always can find investment of a reasonably 
profitable character. 

ARGUMENT NO. 4.--A period of very active business 
and of rapid increase of productive capital uses up 
the savings funds faster than they accrue and will 
even draw heavily upon the resources of all credit 
institutions, so much so that towards the end of such 
a period we find a considerable dearth of liquid capi- 
tal. A period of relaxation, therefore, is bound to 
follow in order to replenish the stock of liquid capi- 
tal necessary for a subsequent period of expansion and 
of new enterprises. 

Let us examine the four arguments above given, to 



58 Various Depression Theories. 

see if they can stand scrutiny; and let us take them up in 
reversed rotation, the last point first. 

REPLY TO ARGUMENT NO. 4.— The scarcity of 
cash funds, often noticed towards the end of a "boom" 
period, is due largely to the fact that during that period 
prices and wages undergo a gradual rise, in consequence 
of which more money is needed for industry and trade. 
If towards the end of a ''boom" period, a general rise 
of, say, 15 per cent, has been effected, the transaction of 
the country's business may call for 10 to 15 per cent, 
more of the circulating medium. To procure the addi- 
tional cash thus needed, business men look to the money 
market, and in consequence a larger part of the savings 
which constantly flow in and which otherwise would be 
available for new enterprises, is absorbed for purposes 
of regular business. Even without this rise in prices or 
wages there is more of the circulating medium required 
in a time of active business than in a dull time. These 
two factors, in addition to the steady absorption of cash 
funds for the sake of launching new enterprises, account 
for the scarcity of liquid capital so often noticed pre- 
vious to the setting in of a crisis.* 

As to the theory that a period of relaxation and of 
forced economy is necessary to replenish the stock of 
liquid capital which would be required for another 
"boom" period, I refer to the discussions following Ex- 
planations Nos. 1, 2, 3, 4 and 5 in Chapter II. In those 
Explanations I have considered every imaginable form 
in which this replenishing process possibly may assume 
practical shape, and have shown that all of those Ex- 
planations lose sight of the enormous amounts, running 
into billions, which we have to deal with when trying to 
explain what becomes of the surplus earnings, available 

* A further factor which, at times, contributes towards creating 
a scarcity of cash funds, will be discussed on page 161. 



Various Depression Theories. 59 

for investment, which accrue in the course of several 
years of depression. The view most current is, that such 
funds lie over in the shape of : " loanable funds." Let us 
fully understand the meaning of this word "loanable"; 
it does not mean funds "loaned out" (for that would 
imply funds which have found employment), but funds 
ready to be employed, and in the meantime lying idle. 
The adherents of this view altogether fail to consider that 
such loanable funds would, first of all, show up in the 
commercial banks; that, inasmuch as they remain unem- 
ployed, they would rapidly accumulate there to a stu- 
pendous amount; that each year of sharp depression, 
such as prevailed in the United States from 1893 to 1897, 
would add hardly less than one billion dollars to the idle 
funds of the country, making an aggregate of four bil- 
lions for the four years — while as a matter of fact the 
banks showed only an insignificant increase of their loan- 
able funds at the end of that period, in 1897, as com- 
pared with 1892. .All of these facts, which have been 
fully discussed in Chapter II, disprove the above stated 
view as to the usefulness of a period of depression in 
increasing the country's liquid capital or replenishing 
the funds depleted in the preceding "boom" period. 

REPLY TO ARGUMENT NO. 3.— The latter has so 
far been considered unanswerable. It seems plausible to 
infer that if savings funds available for capitalistic in- 
vestment, that is, for the creation of new wealth, did not 
find their employment to that end, they would accumulate 
in the money market ; and inasmuch as no such accu- 
mulation takes place, it has been assumed that sooner or 
later they really do find investment in the capital-produc- 
ing form. It must be conceded that if this latter form 
were the only one in existence for investing such funds, 
this argument would be conclusive. But it is not the 
only form. In Chapter III it has been shown that the 



60 Various Depression Theories. 

savings funds are not confined to investment in the Cap- 
italistic Form, but often find it in the Impairing Form — 
a fact which completely upsets Argument 3. 

REPLY TO ARGUMENT NO. 2.— There is some truth 
in the assertion that the growth of productive capital is 
in a certain way self-sustaining, inasmuch as this growth 
is followed by an enlarged demand for commodities. But 
that demand will not grow in the same proportion. If it 
did, there would not be that universal excess of produc- 
tive capital above the demand for it. This excess exists 
in spite of the fact that there are times when it seems to 
disappear and when the demand for commodities grows 
large enough to keep the productive capital fairly well 
employed. Such keen demand is not normal, but is fos- 
tered by special circumstances. It occurs, strange to say, 
just at seasons when a rapid increase of productive cap- 
ital takes place; and, what is still more strange, it is 
caused by the very act of building up such productive 
capital. By that act, so long as it lasts, the general de- 
mand is temporarily stimulated. Capitalists who are 
building new railroads, factories, houses, machinery, &c, 
become consumers for the time being, inasmuch as they 
engage working forces to a large extent and thus in- 
crease the general demand ; when through building, how- 
ever, and when about to set their works agoing, they 
become producers where they were consumers and are 
thus beginning to increase the supply and to decrease 
the demand A multitude of such cases will result in a 
growing disparity between demand and supply and will 
therewith re-establish that relative superabundance of 
productive capital which forms the normal state of 
affairs. 

Boom periods, where the demand almost equals the 
supply, are always accompanied by a rapid increase of 
productive capital, and are, in fact caused by this rapid 



Various Depression Theories. 61 

increase. Were this increase self-sustaining, as assumed 
in Argument No. 2 ; in other words, were the growth of 
productive capital followed by" a corresponding growth 
of the demand, then there would be no reason why the 
demand, after a while, should lag behind. The fact that 
it does lag shows conclusively its inability to keep pace 
with the growing powers of production. 

REPLY TO ARGUMENT NO. 1.— There are many 
economists who reject the idea that the alleged super- 
abundance of productive capital should form a barrier 
against the still further growth of such capital. They 
hold that all arguments in that direction are met by the 
simple fact that capital 2 , in spite of that barrier, is con- 
stantly increasing andthat there is room for the increase 
— a point which indeed sounds plausible and unanswer- 
able. In reality, however, this point is no more conclusive 
than would be the assertion that our civil laws form no 
barrier against crime, on the plea that these laws are con- 
stantly being trespassed against. The barrier is not an 
absolute one in either case ; still it exists, and is eminently 
effective. The superabundance of capital 2 forms no 
absolute barrier against its increase, but it keeps that in- 
crease within narrow limits, such as are drawn by the 
extent of the demand for the products of capital. If more 
capital exists in any special line than necessary to meet 
the demand, and if the excess should surpass a certain 
proportion, say 15 or 20 per cent., that excess will cer- 
tainly put a stop to the further increase of capital in 
that line, except in sporadic cases where an enterprising 
capitalist has, or thinks he has, special advantages for 
competing. 

Were that barrier not in existence, and were the 
growth of productive capital merely dependent upon the 
supply of savings funds applicable to that purpose, cap- 
ital would, long before this, have grown to an extent be- 



62 Various Depression Theories. 

yond all conception. An idea of the rapidity with which 
capital would expand under such circumstances may be 
gained from the following examples: 

EXAMPLE NO. 1. — As is well known, a penny loaned 
out at the time of Christ at a moderate rate of compound 
interest, and accumulating undisturbed, would now have 
grown to an amount impossible to pay. If we consider 
that at present there are funds amounting to many billions 
of dollars loaned out or invested, and growing on the com- 
pound interest principle, the question arises, can these 
funds keep on growing at that ratio for any great length 
of time? If we consider furthermore that the elements 
of insecurity which in past ages hampered the continued 
accumulation and conservation of capital are being more 
and more eliminated, and if we consider that on this ac- 
count the accumulation process goes on all the more 
rapidly — is it not evident that the accumulation must 
reach the limit of the possible much sooner than in the 
case of the penny — and must indeed reach it within a 
comparatively short time? 

EXAMPLE NO. 2. — In prosperous years the people of 
the United States save up and turn into capital 2 about 
one-seventh of their income. For the ten j^ears from 1880 
to 1890 the income has been estimated at an average of 
14 billions per annum, and if we figure the savings at 
one-seventh of this amount — that is, 2 billions annually 
for ten years— we arrive at an aggregate of 20 billions. 
This amount approximates the actual gain in wealth 
which, according to Census reports, took place in that 
period, viz., from 43 billions in 1880 to 65 billions in 
1890. For the ten years from 1S90 to 1900, which in- 
cluded only six years of prosperity, the increase has been 
variously estimated at from 23 to 29 billions, which again 
would represent a saving power of about one-seventh of 
the people's aggregate income, figuring the latter at 20 



Various Depression Theories. 63 

billions, on the average. Could such a rate of accumula- 
tion, growing larger from year to year, be kept up for a 
long time, say, for centuries in succession? 

EXAMPLE NO. 3.-— If the people of the United States 
can, under favorable circumstances, accumulate one- 
seventh of their income, though they are not regarded as 
possessing much of a propensity for saving, how much 
larger ought to be the savings and the accumulated 
wealth of such thrifty peoples as the Dutch and the 
French ! If we figure only a ratio of 10 per cent, of their 
income which, under favorable circumstances, they could 
put by, and carry the calculation back for three or four 
centuries, starting with any sum half way within the 
limits of the probable as representing the people's annual 
income at that time, the total accumulated wealth should 
be many times greater than it really is — especially so if 
we consider that the annual increase in wealth will in- 
crease the people's income, and, in turn, the increased 
income will augment the people's saving power, and 
therewith the annual accumulation. In view of this 
reciprocal action, all tending toward an enlargement of 
the country's wealth, we would be fully justified in 
figuring the growth of the latter on the compound inter- 
est principle, and if so, we would find a stupendous dis- 
crepancy between the wealth there is and the wealth 
there ought to be. 

These three examples should be sufficient to demon- 
strate the enormous cumulative power of the saving pro- 
cess — provided this cumulative principle had free scope. 
It is well understood, however, that it has not. But why 
not? In the case of the penny referred to in Example 1, 
we all know the reason — social and political disturbances 
of the most radical character, whifh made it impossible 
for any aggregation of capital to survive. In the case 
of France and Holland it may also be held that the dis- 



64 Various Depression Theories. 

erepancy above mentioned can be fully accounted for by 
wars and other disturbing influences. But the damage 
from wars — devastation of property, and war expenses, 
sustained by Holland and France in the course of sev- 
eral centuries — would represent only an insignificant 
proportion of that discrepancy; and a still smaller pro- 
portion would be represented by disturbing factors other 
than war Excepting these temporary adversities, the 
extraneous conditions should have been favorable and 
should have allowed a rapid accumulation of wealth, in 
proportion to the people's saving power. If neverthe- 
less that rapid accumulation did not materialize there 
must have been a hidden cause at work to prevent it — a 
cause which despite the favorable extraneous conditions 
created unfavorable inherent conditions sufficient to 
check the cumulative power and therewith the growth of 
wealth and of productive capital. Just so with the 
United States. Its rapid rate of increase in wealth can 
not continue forever. It will be restrained by the same 
factor which has limited the accumulation process in the 
older countries. 

We need not look far to find this factor — it consists 
of the fact that ordinarily the extent of the productive 
capital already in existence exceeds the demand therefor, 
thus curtailing the incentive for building up still more of 
it. This almost continuous superabundance of capital, 
which has been a characteristic feature of past ages as 
well as of recent times, reduces the opportunities for 
profitable investment; and thereby forms a most effective 
barrier against the unlimited creation of new productive 
capital. 

Economists are not generally inclined to consider this 
natural barrier in the proper light, and prefer to believe 
that such a barrier either must be an absolute one, or that 
it dees not exist at all. Many of them seem to hold that 



J'arichis Depression Theories. 65 

so long as there is a house left to be built, or any sort of 
enterprise still to be carried out, so long can there be no 
lack of opportunities for profitable investment of billions 
of savings funds and, therefore, no barrier. That the 
latter is only relative and not absolute seems to have 
escaped their attention. They are unaware of the fact 
that whenever, on account of this barrier, the oppor- 
tunities for profitable investment in new constructions 
become scarce, only a part of the savings funds will find 
investment in that form — the balance simply being 
diverted to the Impairing Form, as explained in Chap- 
ter III. 



Of the four arguments considered above, which form 
the chief support of what we properly may call the 
"Lack-of-Funds" theory, not one can stand scrutiny. 
The "boundless opportunities" for the expansion of pro- 
ductive capital do not exist. On the contrary, wherever 
opportunities turn up for safe and half-way profitable 
investment, there is, ordinarily, no lack of savings funds 
to make use of them. And though there may be periods 
where this truth does not seem to hold good, and where 
the crreat demand for new constructions creates a demand 
for cash funds far in excess of the possible supply — as has 
recently been the case in the United States and in Ger- 
many — it is well understood that such exceptional periods 
will not last and that sooner or later the ordinary state 
of affairs, the excess of productive capital over and above 
the demand for it, will reassert itself. As soon as it does, 
there is no longer a scarcity of funds such as are avail- 
able for new enterprises. 

While the lack-of- funds theory will undoubtedly ac- 
count for the origin of most of our crises, as set forth in 
Chapter I, it will not account for the period of continued 
depression which so often follows the crisis. 



66 Various Depression Theories. 

DEPRESSION THEORY NO. 2. 

(EXCESSIVE PROFITS.) 

This theory makes a sharp distinction between the 
wealthy classes and the working classes, ascribing to the 
latter the greater consumptive power and to the former 
the greater accumulating power. Thus, for illustration, 
out of an income of $20,000 going into the hands of the 
working classes, more than $19,000 are likely to be ex- 
pended for consmnptibles and less than $1,000 to be ac- 
cumulated ; while out of the same income, if going into 
the hands of the wealthy, only $10,000 may be spent and 
as much as $10,000 accumulated. Evidently, therefore, 
the larger the share which out of the people's total in- 
come goes to the working classes, the greater the demand 
for consuraptibles ; and again, the larger the share which 
goes to the wealthy, the greater the accumulation; and 
inasmuch as the accumulations generally are turned into 
productive capital (i. e., into capital which produces com- 
modities), we also might say, the greater the production 
of commodities , A plentiful income on the part of the 
working classes and of the masses, therefore, favors the 
demand, while a plentiful income on the part of the 
wealthy favors the supply. The theory ascribes the gen- 
erally existing disparity between demand and supply to 
the fact that the share of income received by the working 
classes is too small, that of the wealthy too large. 

This faulty division, as the theory has it, occasions no 
disturbance in times of general prosperity, since at such 
times the deficiency of the demand on the part of the 
working classes (due to the deficiency of their income) 
is compensated for by the increased demand emanating 
from the wealthy, the latter investing their surplus earn- 
ings in the creation of new wealth and productive cap- 
ital, and therewith bringing an increased demand for 



Variovs Depression Theories. 67 

working forces into the market. At such times, there- 
fore, the working forces are well employed. After a 
number of years, however, the rapid creation of new pro- 
ductive capital will slacken, as the demand can not fol- 
low, and then the consequences of the above-mentioned 
faulty division manifest themselves in the shape of a 
growing preponderance of the supply, culminating in a 
depression. # # # # # # # # 

There is much truth in the foregoing theory, and in 
itself it is not antagonistic to the true cause of depres- 
sions, such as will be developed in the next chapter; but 
it does not go far enough, and falls short of discerning 
the primary cause. We may conceive a state of affairs 
where that faulty division of income is carried to ex- 
tremes and where the working classes practically receive 
no income at all, being kept like slaves, and still busi- 
ness would prosper provided the wealthy would expend 
the enormous accessions to their income either for lux- 
uries, or in the steady expansion of new capital 2 and 
wealth. Evidently, therefore, that faulty division of in- 
come is not in itself sufficient to cause a depression, but 
some other more potent factor must come into play to 
lead to that result. 

The theory acknowledges the fact that the faulty 
division will do no harm so long as the funds accruing 
from the savings and surplus earnings of the wealthy are 
invested in the creation of new productive capital, and 
thus give employment to the working forces engaged in 
that line. But the theory overlooks the natural question. 
If the funds, though not applied towards new construc- 
tions, are invested in some other way, why do they not 
give employment to some other class of working forces? 
If in either case the savings funds meet real investment, 
such as will cause them finally to be dissolved and to be 
paid over to working men and business men in the pur- 



68 Various Depression Theories. 

chase of commodities, why should there be prosperous 
conditions and full employment for the working forces 
in the one case and unemployment in the other? If it is 
the different mode of investment which entails the unem- 
ployment and the stagnation in trade, the matter should 
be explained, for then the cause of the trouble evidently 
lies right here, not in the faulty division of income. 

As a matter of fact the "Excessive-Profits" theory 
connects the cause of depressions with the saving process, 
holding that the over-abundant profits and income of the 
wealthy stimulate that process to an undue extent and 
therewith the excessive construction of new productive 
capital — and in this respect there is much truth in the 
theory. But it does not show us in what manner the 
deleterious influence of the saving process takes place, 
and therefore falls short of discerning the direct and im- 
mediate cause of depressions. It loses sight of two im- 
portant questions; first: If, at times of depression, the 
savings funds do not find investment, where are they, 
since they do not show up in the money market; and 
again : If they do find investment, why do they not 
give employment to working forces, and why should the 
latter be so largely condemned to idleness? 

There is another version of Theory No. 2 ; as it were, 
a modification of same, which limits itself substantially 
to the point that the production of such consumptibles as 
are used by the working classes absorbs and employs 
more working forces than are required in the produc- 
tion of such commodities as are consumed by the wealthy; 
in other words, that $1,000 expended for the common 
necessaries of life would bring more working forces into 
action than $1,000 expended for luxuries; and that for 
this reason the faulty division of income above referred 
to works injuriously. If we thus limit the scope of the 



Various Depression Theories. 69 

theory, it is still less apparent why the said factor should 
show its ill effects only at times of depression, or why it 
should lead to a depression at one time and not at an- 
other. Nor is the very starting point of this version of 
the theory correct. True, the manufacture of $1,000 
worth of luxuries calls for a smaller number of workers 
than would the production of $1,000 worth of necessaries; 
but we have to bear in mind that the individuals produc- 
ing the luxuries will, on their part, when expending 
their income, create a demand for common necessaries. 
And when adding the latter class of demand to the other 
it is not apparent why there should be any deficiency in 
the aggregate. 

DEPRESSION THEORY NO. 3. 

(DISPROPORTIONS.) 

The fundamental part of this theory hinges on dis- 
proportions existing between economic factors; too much 
of the one, too little of the other. There may be a dis- 
proportion (1) between the various lines of production; 
(2) between the aggregates of city population and country 
population; (3) between the volume of capital flowing 
into some lines of business and that flowing into other 
lines; (4) between the income of the wealthy and that, of 
the working classes; (5) between the volume of produc- 
tive capital and the demand for its products — and in 
fact between many other economic factors such as ought 
to maintain due proportions to one another. 

In sum and substance Theory No. 3 ascribes economic 
disturbances to a lack of system in productive activity — 
to the absence of a governing power controlling produc- 
tion and distribution which would cause the various eco- 
nomic factors to work harmoniously with each other. 

When examining the various forms of disproportion 



70 Various Depression Theories. 

enumerated above, we first ought to eliminate those given 
under Nos. 4 and 5 — the one having been already treated 
of under "Theory No. 2," page 66, and the other being so 
closely related to the main theme of this treatise as not 
to require especial consideration in this place. As a mat- 
ter of fact, Theory No. 3 is generally understood to con- 
fine itself chiefly to such factors as relate to the broad 
fields of production. Limiting our discussion accord- 
ingly, and Aveighing the pros and cons as to whether de- 
pressions and disturbances can really be traced to dis- 
proportions of this nature, the following objections would 
present themselves: 

OBJECTION NO. 1.— That there is, in many lines of 
business, an excess of the means of production cannot 
be doubted; but is there an excess of actual production? 
Is not the so-called over-production becoming more and 
more a matter of the past, and does not production under 
modern conditions adjust itself very closely to the de- 
mand? Take, for instance, iron and steel, the output 
of which a few years ago attained enormous proportions 
in the United States — did not the production promptly 
decline with the diminution of the demand in 1903 and 
1904? Was there, at any time, a real overproduction in 
this line, or in any other line of manufacture, that did 
not speedily correct itself?* If we find a close adjust- 
ment of the supply to the demand to obtain everywhere, 

* A seeming exception to this rule may be found in the produc- 
tion of copper in the United States, enormous over-supplies having 
come to light in 1903 and again in 1907. In both instances, however. 
the overproduction was intentional, forming part of a scheme for 
manipulating the stock market. While the overproduction went on, 
an artificial scarcity of the metal was created by means of hiding a 
part of the output out of sight, the public being made to believe that 
all of the enormous production was quickly selling at excessive 
prices. On the strength of this belief the shares of the copper min- 
ing companies advanced to high figures and were then unloaded by 
the "insiders" on this inflated basis. When the truth became known, 
and the over-supplies came to light, an enormous drop of prices 
ensued, not only in the metal but more so in the shares, which en- 
abled the insiders to buy their shares back at half the price they 
had sold them at. Such manipulative overproduction does not dis- 
prove the rule stated in the text above. 



Various Depression Theories. 71 

we evidently have no right to assert that there is too 
much production going on in the one line of business 
and too little in the other. Or take as another kind of 
disproportion the flocking of the country people into the 
cities — is not the main reason for this migration to be 
found in the fact that city work pays better than farm 
work? And if so, does not this migration rather tend 
to correct a disproportion than to create one? Finally, 
referring to the third kind of disproportions mentioned 
above, is there much truth in the oft-repeated assertion 
that too much cash capital is flowing into some lines of 
business, and too little into others? Do not investors nat- 
urally select such lines of business as are least overrun, 
and which therefore give best promise of adequate re- 
turns? True, such a promise may subsequently fail of 
fulfillment, owing to a falling off of the demand. For ex- 
ample, prior to 1903 much cash capital went into the con- 
struction of iron and steel plants in the United States, 
and when later on the demand for the product of these 
plants fell off, much was heard about the expansion hav- 
ing been out of proportion to the real requirements. But 
did such disproportion exist at the time the investments 
were made? 

The gist of Theory No. 3 is represented by the assump- 
tion that a partial overproductive engenders a general 
overproduction. But if the former does not exist, how 
can the general overproduction be ascribed to it? 

OBJECTION NO. 2.— If we were to believe that the 
maintenance of proper proportions between the various 
lines of production insures prosperous times and a dis- 
proportion leads to the opposite result, we might ask the 
question, Did the business men of the United States ex- 
ercise good judgment in this direction all through the 
thirteen years of prosperity from 1880 to 1893, while in 
the subsequent four years of depression they failed to do 



72 Various Depression Theories. 

likewise? The supposition which this question implies 
is simply preposterous, and Theory No. 3 certainly can- 
not stand where it leads to such conclusions. As a mat- 
ter of fact, the business men acted just as intelligently at 
the one period as the other, and at either time did their 
best to adjust their production to the requirements of the 
market. 

True, there is one line of production that is in a great 
measure beyond control by human foresight, and where 
the annual output therefore may vary considerably ; that 
is. agriculture. The products of agriculture represent 
such a large share of the total production that their 
scarcity or abundance should certainly affect the aggre- 
gate in the manner assumed in Theory No. 3, were that 
theory correct. As a matter of fact, however, we find a 
poor crop to occur now and then in a period of pros- 
perity, and a good crop while times are bad, but as a rule 
the general drift of business is not reversed by such oc- 
currences. If overproduction in such an important line 
as agriculture fails to turn the tide, how can we expect 
such a result from other lines, which are on the one hand 
less important and on the other far more within human 
control ? 

OBJECTION NO. 3.— Obviously the principle of dis- 
proportion, as enunciated in Theory No. 3, could be held 
responsible for depressions only if it could be proved to 
lead to a diminution of the general demand. 

Theory No. 3 attempts such a proof on the following 
line of reasoning: In one or some lines of business there 
occurs an overproduction, or at least excessive competi- 
tion. In consequence, prices in those lines will fall ; 
therewith the income of the respective producers ; and 
therewith their purchasing power. Owing to this lessen- 
ing of the purchasing power on the part of these individ- 
uals the producers in all other lines of business cannot 



Various Depression Theories. 73 

sell them so much as before; therefore these other lines 
will also suffer, and the partial overproduction becomes a 
general one. 

Let us see how far this line of reasoning can stand 
scrutiny. To this end let us select some special trade, 
say, the shoe business, and let us assume, for the sake 
of argument, that this industry embraces 10 per cent, of 
all the working forces 6 of the community. Let us desig- 
nate the people so engaged as Group D ; the remaining 90 
per cent., embracing all other lines of business, as Group 
S. Suppose the first-named group be compelled, by sharp 
competition, to reduce the selling price of shoes by 20 
per cent.; will the members of the other group (S) really 
suffer thereby and find their purchasing power lessened? 

To investigate this question, let us further assume the 
purchasing power of the whole community to be $1,000 
per annum, of which $900 comes from Group S and $100 
from Group J). Now, suppose that the break in prices 
above referred to, sets in, and that Group D will subse- 
quently realize only $80 for their goods (shoes) instead 
of $100 as before; which means that the purchasing 
power of Group D is lessened by $20. Evidently the 
members of Group S will now spend less money for shoes. 
If their expenditures on this account had formerly been 
$90 per annum, they can now buy the same goods for $72, 
and have $18 over, which amount becomes available for 
buying other kinds of commodities, additional to those 
theretofore purchased by that group. This increased 
purchasing power on the part of Group S will give em- 
ployment to a third group, T, to the amount of $18, and 
the latter group will at once become a purchaser to that 
extent and will fully make up for the reduced purchasing 
power of Group D. Even the seeming discrepancy be- 
tween the surplus of $18 coming to Group S as against 
the loss of $20 sustained by Group D, disappears when 



74 Various Depression Theories. 

considering that the members of the latter group, who so 
far have been spending $10 per annum to buy what they 
themselves needed in the line of shoes, can now buy what 
they need for $8, so that their rear loss of purchasing 
power comes to only $18, not $20. 

Now let us figure the totals. Owing to excessive com- 
petition among those employed in the shoe business, their 
purchasing power becomes reduced from $100 to $82; 
that of ajl other classes rises from $900 to $918; making 
an aggregate of $1000. Before the sharp competition set 
in, the aggregate purchasing power amounted also to 
$1000. Where, then, does the falling off of the demand 
come in? 

Thus when going into details and resorting to figures, 
we find no substantial basis for the assertion that the 
cheapening of some lines of goods, caused by a partial 
overproduction or by excessive competition, in any line 
of industry, should lessen the purchasing power of the 
community as a whole, or reduce the aggregate of the de- 
mand. Just the reverse takes place — the cheapening of 
any line of goods will benefit the community ond increase 
its purchasing power — perhaps not in terms of money, 
but certainly in the volume of goods which the money 
will command. ******** 

When speaking of overproduction, economists often 
do not mean excessive production of the commodities as 
such (which, as staled before, is more and more becoming 
a matter of the past) but an excess of the means for, 
production. By overproduction in any special line they 
mostly mean an excess of productive capital in that line. 
And it is the alleged disproportion in building up pro- 
ductive capital, too much in the one branch of industry 
and too little in the other, to which they principally 
ascribe the derangement of business and the resultant 
depression. 



Various Depression Theories. 75 

But a depression cannot take place without a falling 
oft' of the demand ; and why the demand should suffer 
owing to the said disproportion, that has never been 
proved. Any attempt to establish such a proof would 
at once come to naught when trying to substantiate it 
by means of figures. 

Suppose there be an excess of cash funds invested in 
the creation of bicycle plants and too little in shoe fac- 
tories; true, this disproportion will result in a lessened 
demand for working forces so far as the building of 
shoe factories is concerned, but will not this be fully 
compensated for by the increased demand arising from 
the building up of the bicycle plants? And if the said dis- 
proportion will not reduce the demand while building 
the factories, have we more reason to believe that it will 
do so later on, when operating them? It might be 
held that while part of the bicycle plants would stand 
idle for lack of work, there would not be shoe factories 
enough to meet the demand for shoes, and to give em- 
ployment to the bands required to supply this demand. 
But if such were the case, we should expect to see on the 
one hand a sharp rise in the price of shoes and on the 
other hand a lack of cash funds available for building up 
new factories in this line — while as a matter of fact we 
find neither the one nor the other, in any line of business, 
except under unusual circumstances. Where are those 
lines of industry which offer opportunities for safe and 
paying investment at times of depression, and for which 
the funds to make use of such opportunities cannot be 
obtained? 

Here we encounter the vulnerable point of the theory 
that too much cash capital goes into the one line of busi- 
ness and too little in the other. Were this assumption 
true, the neglected line should be noted for high prices 
and scarcity of supply, as the only possible result of that 



76 Various Depression Theories. 

disproportion. The adherents of said theory, however, 
argue the other way, and contend that the lack of invest- 
ment funds going into the neglected line, and the conse- 
quent restriction of the means of production, would re- 
sult, not in high prices and scarcity of the supply but in 
overproduction and low prices — a paradoxical conclu- 
sion, to say the least. 



Out of the great number of theories which econo- 
mists have brought forth to explain the cause of depres- 
sions, I have, in the foregoing pages, been discussing the 
three which count the greatest number of adherents. All 
these theories ascribe the depression to the relaxation 
of new constructions, differing, however, as to the causes 
of this relaxation; the one theory assigning it to a lack 
of the funds necessary to keep up the rapid expansion of 
productive capital, such as took place in the ' preceding 
"boom" period; the other assigning the relaxation to the 
excessive income of the wealthy classes, which is thought 
to lead to an excessive construction of new productive 
capital and to an undue stimulation of the supply, so 
much so that in course of time the demand can no 
longer keep pace with the supply; the third theory as- 
signing the relaxation to a disproportion between the 
economic factors that should maintain an equilibrium in 
order to avoid overproduction. But while each one of 
these theories regards the lull in new constructions as 
being an indispensable prerequisite for the setting in of 
the depression, this lull, as will be shown later on, is 
neither the direct and immediate cause of it, nor indeed 
an indispensable prerequisite. I repeat that if we recog- 
nize the true cause of depressions and find the means 
of removing it, the process of new constructions might 
practically come to a standstill, and yet business would 
prosper. 



CHAPTER V. 



THE "NEGLECTED POINT " AS THE 
TRUE CAUSE OF DEPRESSIONS. 



I 



N Chapter 3 it has been shown that savings, such as are 

available for investment, will, in times of depression, 
find investment in the Capitalistic (capital-producing) 
Form only to a limited extent, the balance finding it in 
the Impairing Form. It has also been shown that, if they 
are so invested, a diminution of the demand, with all its 
ill effects, is the inevitable result. 

Now I wish to emphasize that when speaking of the 
''Impairing Form of Investment" this term should not 
be understood as attributing these ill effects to the in- 
vestment as such, the act of investing being invariably 
beneficent, from an economic standpoint, inasmuch as it 
restores the savings funds to the channels of industry and 
trade, thereby preventing the hoarding of funds and the 
strain resulting therefrom which would otherwise be en- 
tailed by the saving process. 

Seemingly there is a contradiction in the two fore- 
going paragraphs, one of them stating that the invest- 
ment, if made in the Impairing Form, means a diminu- 
tion of the demand; the other, that the investment as 
such will not lead to a diminution of the demand. Some 
light may be thrown on this seeming contradiction, how- 
ever, if we bear in mind that the act of investing is a se- 
quence of the act of saving, these two acts being often 
considered as mere phases of the accumulation process. 
Can the disturbing element, if not due to the invest- 
ment process, be charged to the saving process? 

Is it possible that the saving activity as such can 



78 The "Neglected Point" as the 

exercise any injurious influence in the direction of cur- 
tailing the demand — that is, the demand for working 
forces'? 

All economists agree that it can. In its primary stage 
the saving process is always accompanied by an injuri- 
ous tendency, inasmuch as the saver is constantly trying 
to buy less from the community in the line of goods or 
services than he sells to it, and thus is disturbing the 
equilibrium of supply and demand. This equilibrium is 
restored only by the investment. It is understood that by 
means of the investment the demand for goods or services 
— i. e., for working forces 6 — will reappear in the market. 
Thus, if somebody saves $1,000 he will first create what 
we might call a "minus of demand" to the extent of 
$1,000. But whenever he invests his savings, say, in 
building a house, the money is spent for labor, for pro- 
duction of the necessary material, supervision, etc. ; so 
he transforms the $1,000 into wages and profits, i. e., 
into income for others, and in doing so he employs work- 
ing forces and creates a demand for them fully sufficient 
to couterbalance the minus of demand referred to above. 

But while this restoration of the equilibrium between 
supply and demand will undoubtedly take place under 
the Capitalistic Form of investment, that is, where new 
constructions of some kind are being created, will it also 
take place under the Impairing Form, where, as we have 
seen in Chapter 3, the act of investment will not call for 
working forces? Will the minus of demand, and the 
consequent unemployment, as originally caused by the 
act of saving, be wiped out by the act of investment, 
where the latter brings no demand for working forces 
with it? Certainly not. Under such circumstances the 
injurious tendency connected with the primary stage of 
the saving process is no longer counterbalanced, and if 
not counterbalanced if will go into effect. This being the 



True Cause of Depressions. 79 

case, it must be the saving activity, not the investment, 
to which are due the harmful results that follow. The 
mode of investment merely determines whether those 
harmful tendencies inherent in the saving process become 
operative or not. They certainly will become operative 
whenever they are no longer counteracted by the invest- 
ment, i. e., whenever the latter assumes the Impairing 
Form. 

To recall to our mind the modus operandi of that 
peculiar form of investment, let us repeat its salient 
points, as developed in Chapter 3. 

Whenever the Impairing Form of Investment prevails, 
as is the case in times of depression, the savers do not 
apply their funds in such a way as to turn them into in- 
come for those whom the funds go to. They do not buy 
personal services with the money, nor goods for consump- 
tion, because that would be spending the money, whereas 
they mean to save it; nor do they (or others for them) 
invest it in building up new productive capital, because 
new enterprises rarely pay in times of depression. They 
need not do either, and still they can invest their funds; 
the opportunities for doing so turning up in a rather 
roundabout way. Inasmuch as they abstain from going 
into new constructions, the group of working forces 6 or- 
dinarily employed in such constructions is reduced to 
idleness. The income of these working forces diminishes 
accordingly. The loss of income means a lessening of 
their purchasing power; this, a slackening of the demand 
tor commodities ; this again, a curtailment of the pro- 
duction of such commodities and a lack of employment 
for the producers and distributors of same. Thus the en- 
forced idleness of the first-mentioned group of working 
forces, the "Constructive Forces," will react upon another 
group, in the line of the "Commodity "Working Forces 7 ," 
reducing them to idleness also (at least to some extent), 



80 The ''Neglected Point" as the 

and this process of action and reaction will spread from 
the second group to the third, from there to the fourth, to 
the fifth, and so on, bringing with it in every instance a 
diminution of the demand and a corresponding annihila- 
tion of income, and thus causing a considerable multipli- 
cation of the ill effects and of the unemployment sus- 
tained by the first group. The loss of income of, say, 
$1,000 on the part of the first group may, by reason of 
this " Multiplying Principle", be augmented to a total 
loss of income of perhaps $3,000, or $4,000 or $5,000 
(varying according to circumstances), distributed among 
many groups of individuals. 

These groups are composed not only of working men 
but also include business men, many of whom find their 
trade and their income more or less curtailed, and in 
consequence are "running behind" where they used to 
make a profit. To meet their expenses, they find them- 
selves compelled to borrow, or to realize on their prop- 
erty. When they do, the funds of the savers come into 
action, either by supplying the money needed to make the 
loans, or purchasing property such as the impoverishing 9 
owners can not hold. 

It is in this manner that "Excess" Savings, (see page 
38) the kind of savings characteristic of times of depres- 
sion, are invested. The savers, or those acting for them, 
will not employ their funds so as to create new wealth 
or productive capital, but will simply confine themselves 
to buying capital goods (fixed property, securities, etc.) 
already in existence. The savings funds re-enter the gen- 
eral circulation of industry and trade not by the act of 
investment, but by the expenditures of the impoverishing 
borrowers and sellers, who expend the money to meet their 
living expenses or their losses in business. No working 
forces, therefore, will be called into action, by the act of 
investment, under such circumstances. And if so, the 



True Cause of Depressions. 81 

original minus of demand, caused by the act of sav- 
ing, is not compensated for by the act of investment.* 



All economists agree that the saving activity will cause 
a minus of demand unless this minus be counterbalanced 
by the act of investment. And inasmuch as practically 
all savings funds are invested (otherwise they would ac- 
cumulate in the money market) the economists concluded 
that such counteraction always does take place, no mat- 
ter what the particular form of investment. We have 
shown, however, that this is the case only if the savings 
are invested in the Capitalistic Form, not if in the Im- 
pairing Form. The latter form will, quite automatically, 
become operative as soon as the opportunities for Capital- 
istic Investment grow scarce. Whenever they do, the 
saving process changes its character. Its inherent per- 
nicious tendency will no longer be checked, and the sav- 
ers' everlasting endeavors to increase the supply and re- 
duce the demand will no longer be restrained from 
becoming effective— resulting in that disparity between 
demand and supply which we call depression. 

Here we encounter the factor which introduces the 
minus of demand into our business organization as a posi- 
tive, definite and unmistakable element — the long-sought- 
for cause of the chronic disparity between demand and 
supply, and the true cause of depressions. 

I have so far, in this treatise, spoken of the "Impair- 
ing Form of Investment"; more properly it should be 
called the "Impairing Form of Saving." Though the 
manner of investment decides whether any harmful con- 
sequences take place or not, we should not lose sight of 

* Further argument on this point will be found in Chapter 6, 
especially on pages 92, 96 and 118. 



82 The ''Neglected Point" as the 

the fact that the source of the harmful tendency is to be 
found not in the investment but in the saving process. 
If the latter process could be brought under control, and, 
at times of depression, could be so circumscribed that 
Excess Savings— more properly called "Impair Savings" 
— would become impossible, i. e., that no savings could 
be made except such as can find investment either for 
Replacement purposes, (see page 36) or in the Capitalistic 
Form — in other words, if people could be compelled to 
expend for luxuries such part of their surplus income as 
could not find investment in the two ways just men- 
tioned, the depression would at once be brought to an 
end. There would not then be an excess of working 
forces, since they would be absorbed in the production 
of luxuries (see page 108), so far as not employed in new 
constructions or for purposes of Replacement. Given the 
possibility of checking or controlling the people's saving 
activity so as to prevent the formation of "Impair Sav- 
ings," a relaxation in new constructions, in fact their 
complete suspension., might take place, and still business 
would prosper, for there would be no disparity between 
the aggregate demand (for working forces) and the ag- 
gregate supply. 

If, then, the suspension of new constructions does not 
necessarily lead to a depression, while the saving pro- 
cess, in its Impairing Form, most positively does so, it 
follows that the latter factor is the more powerful, the 
deciding one. As a matter of fact, this factor constitutes 
the ruling feature of all depressions. 

W *?r *«■ *n* -S* 3t* * ^r ^F 

A billion dollars of savings, applicable to the creation 
of new capital or wealth, but not so applied, can not find 
investment unless the non-savers of the community either 
become indebted or alienate property to the amount of a 
billion dollars. In Chapter III I have shown what factors 



True Cause of Depressions. 83 

come into play to compel the non-savers to part with 
their property or to run into debts — namely, falling off 
of the demand, unemployment, lack of income, and con- 
sequent impoverishment — all of these factors being 
brought into existence by the same primary factor: Im- 
pair Savings. 

Thus a strange duplex action of the saving process 
can be observed whenever it assumes this "Impairing" 
form : on the one hand that process creates cash funds 
which, once accrued, will seek investment; on the other 
hand it creates market conditions which enable those 
funds to find investment — the bridge between Impair 
Savings on the one hand, and their investment on the 
other, being the impoverishment of the community. This 
specific duplex action, which constitutes the ruling fea- 
ture of the "Impairing" form of the saving process, and 
which comes into play especially at seasons of depression, 
opens up a new field for investments strictly in propor- 
tion as the regular ^ e ^ °$- investment, the formation of 
new productive capital, narrows down. 

The Impairing Form of Investment is not solely con- 
fined to periods of depression. It pervades all times, 
varying in intensity, however. It may be considered as 
the complement of the Capitalistic Form, inasmuch as the 
two forms, co-existing as they are, absorb between them- 
selves all savings funds that are not needed for Replace- 
ments (see paire 36). But the share of absorption be- 
tween the two forms varies. At very prosperous seasons 
most of the savings will be invested in the Capitalistic 
Form, and only an insignificant share in the Impairing; 
at hard times, however, the proportion may be half and 
half. An intermediate proportion will prevail at seasons 
which are neither prosperous nor poor. In new and 
progressive countries, like the United States, the Cap- 



84 The "Neglected Point" as the 

italistic Form will predominate; in unprogressive coun- 
tries, like China, the Impairing Form. The latter is also 
more pronounced in highly developed countries, where 
most of the availahle resources have already been cap- 
italized and where, in consequence, we find the masses 
not so well employed as in the United States, occupying 
a lower standard of life in consequence. That the two 
forms of saving co-exist in our communities, is clearly 
shown by the results; we see on the one hand a constant 
increase of capital, due to the Capitalistic class of saving ; 
on the other hand a chronic lack of demand, due to sav- 
ing of the Impairing class. 

The individual saver seldom has any means of know- 
ing whether his funds belong in the one class or in the 
other; nor does he care to know, as in either case he can 
invest them. He may put them in a savings bank, or loan 
them ou1 on mortgage, or buy a house, or securities, or 
other kind of property with them; but what finally be- 
comes of the funds, after he has thus transferred them to 
others — whether they serve to increase the country's 
wealth or whether they do not, that is none of his busi- 
ness, and is, in most cases, beyond his control. 

As a rule we may take it that such funds as the saver 
does not make use of himself, will always be invested in 
the Impairing Form, this being their natural and primary 
tendency, unless they be deflected from that course by 
being drawn into some capitalistic enterprise. Looking 
at the matter from this standpoint it becomes clear why 
savings, if not finding investment in the Capitalistic 
Form, will, quite automatically, find it in the Impairing 
r orm. #**#**## 

It should be well understood that the harm brought 
about by Impair Savings is of a temporary nature only; 
it ceases as soon as the savings funds re-enter the channels 
of industry and trade, which is the case whenever they are 



True Cause of Depressions. 85 

spent for purposes of consumption, and are thus turned 
into goods or services. 

As it were, each individual case of saving, of the Im- 
pairing Form, brings with it its own sphere of ill effects, 
the latter terminating as soon as the funds are finally 
expended for consumptibies. As a general rule the pro- 
cess, from beginning to end, is short-lived, so far as each 
individual case is concerned. But the multitude of cases 
and their constant recurrence, . in connection with the 
aggravation caused by the Multiplying Principle, pro- 
duce those conditions which in their entirety manifest 
themselves in the shape of stagnation in trade, and in the 
consequent unemployment of a large part of the working 
forces. 

How long it takes before the harmful action is termi- 
nated in each individual case, and how much scope the 
Multiplying Principle has had in the meantime, depends 
upon circumstances, which have been explained in the 
footnote on page 49.* 

* In connection with the varying results traceable to the opera- 
tion of the saving process in the different countries, a peculiar point 
of great practical impoitance should not be lost sight of. One would 
naturally conclude that if Impair Savings are the underlying cause 
of the disproportion between demand and supply, then, the greater 
the aggregate of Impair Savings, the greater the injury they bring 
about; as it were, Impair Savings aggregating three billions should 
be three times more harmful than an aggregate of one billion. This 
conclusion, however, is subject to important modifications. 

For the sake of illustration let us imagine two provinces whose 
resources are being drained by the enemy, one of them having been 
subjected to forced contributions for a year or two, the other only 
for a short time. Naturally the contributions come in more freely 
from the latter province than from the former, whose resources are 
fairly exhausted. Suppose the proportion of the contributions be as 
3 to 1. Now, if we were to take this proportion of 3 to 1 as a meas- 
ure of the damage relatively sustained by the two provinces, we 
would be wrong, inasmuch as the exhausted province may suffer far 
more from the extortion of one million than the other from the loss 
of three millions. Just so with regard to the injury sustained by 
different countries from Impair Savings. In the United States the 
latter may aggregate one billion during a year of depression; in 
China, the country of permanent depression, they may not aggregate 
one-quarter of that sum, and still work far more mischief than the 
larger sum in the United States. To account for this, we have to 
bear in mind that Impair Savings necessitate a change of posses- 
sion, the non-savers losing property in the same proportion as the 
savers acquire it, and evidently this change of possession can more 
readily ^e effpcted in a rich country, where there are many wealthy 
non-savers who have property to lose, than in a country like Chi- 



86 The "Neglected Point" as the 

Though the harmful action, brought about by the Im- 
pair Savings, ceases as soon as the savings are expended 
for commodities, it is important to remember that such 
expenditure can not take place before the damage is 
done. ***#**## 

According to the views now prevailing on the sub- 
ject, savings, as a rule, will benefit the community if in- 
vested, and will prove harmful only if hoarded. Look- 
ing at the matter in the light of our investigation, how- 
ever, we find that savings are invested to a large extent 
in a manner which will not benefit the community, but 
impoverish it and will largely impede trade and business 
activity. Let us summarize the leading features of these 
various forms of the saving process, including the hoard- 
ing form (always keeping in mind that the difference be- 
tween the several forms depends entirely upon the man- 
ner of applying the savings) as follows: 

THE HOARDING FORM, where savings are not invested 
at all, but remain in the shape of idle cash funds, at 
least for a long time. This form is known to be 
highly injurious to business. 

na, where poverty is the rule. And we further have to bear in mind, 
that until this change of possession is effected, the saved-up-funds 
will not re-enter their legitimate course in the channels of industry, 
trade and consumption (the Red Ring of the Chart), and in the 
meantime the "lack of demand" will multiply, unemployment will 
spread, and incomes will shrink amongst the producing classes. 

The injury, therefore, which is brought about by Impair Savings 
cannot be gauged by the totals which they represent, but is de- 
pendent very much upon circumstances. As a general thing, the 
poorer a country, the more harm will they bring about, and the 
more will the harm be likely to assume a permanent character; the 
richer a country, the less harm. Within one and the same country, 
however, the damage done will more closely correspond to the ag- 
gregate of Impair Savings, though even here an exact ratio does not 
obtain; doubling the amount of Impair Savings will more than 
double, perhaps quadruple, the annihilation of income. 

In a certain way we may liken the harm done by Impair Sav- 
ings to that done by hoarding. An amount of $1,000, withdrawn 
from circulation and hoarded, is sure to bring with it more or less 
disturbance by engendering a diminution of the demand; but evi- 
dently to a far greater extent in a country like China where cash 
funds are quite scarce (and where their disappearance is more felt) 
than in the United States, where they are incomparably more 
abundant. What holds true of hoarding also holds true of Impair 
Savings, though in a lesser degree. 



True Cause of Depressions. 87 

THE CAPITALISTIC FORM, where savings are invested 
in the creation of new wealth, principally such as con- 
sists of productive capital. Here the act of invest- 
ment will turn the savings into income for those to 
whom the money goes, in the shape of pajonent for 
services rendered : which services may be rendered 
either in the construction of said capital, or in the 
production of the material for it. This form entails 
no lack of demand for working forces (though there 
is more or less shifting of the latter), but will rather 
stimulate the demand, and tend to increase produc- 
tion and to help business. It enriches the savers as 
well as the community, and is the basis of all accu- 
mulated wealth. 

THE IMPAIRING FORM, where savings are invested 
not in the creation of new wealth but in the acquisi- 
tion of property already existing; this in connection 
with the impoverishment 9 of the previous owners, and 
the impoverishment being brought about by the very 
saving activity on the part of the savers. * This form 
of saving differs from the Hoarding Form inasmuch 
as the savings funds are not left idle for any length 
of time, but are seeking and finding investment. It 
differs from the Capitalistic Form inasmuch as it does 
not lead to the formation of new capital. It en- 
riches the savers at the expense of the non-savers, 
making the latter lose as much property as the savers 
gain, but in addition making the community lose in- 
come to a much larger amount (see page 43). It 
tends to lessen the demand and thereby to impair 
business activity, though not to such an extent as the 
Hoarding Form does. 

The three forms of saving enumerated above com- 
prise only such savings funds as are available for the 
creation of additional wealth — the "Net Savings" of the 
Chart. Other savings are required for Replacements 

* The above does not mean that if B, owing to impoverishment, 
has to sell his house to A, it must be specifically A's saving activity 
which made B poorer. His impoverishment is due to general market 
conditions, to the lack of demand brought about by the concurrent 
saving activity of a great number of individuals. 



88 The "Neglected Point" as True Cause of Depressions. 

(see page 36), and for various minor purposes. The lat- 
ter, however, do not cut much of a figure so their dis- 
cussion need not come within the scope of our present 
inquiry. 

******** 

Apparently, depressions are due to the relaxation in 
new constructions, this being the cause most generally 
assumed in modern economics. The real cause, however, 
must be found in the fact that the saving activity changes 
its character — the Impairing Form of Saving, as just 
defined, prevailing to a much larger extent at times of 
depression. 

There is only one remedy for depressions, and that 
is, The prevention of Impair Savings. To attain this end, 
two methods are imaginable — first, by creating unlimited 
opportunities for profitable investment in building up 
new productive capital, so that all savings, no matter to 
what extent they accrue, can find investment in the Cap- 
italistic Form — which method, as explained on pages 62 
to 64, would be impossible to follow out; second, by 
checking the saving activity, so as to limit the aggregate 
of savings to such a volume as can find investment either 
in the Capitalistic Form or in Replacements (see page 
36), and thus prevent the very formation of an excess of 
savings. If we could bring the saving activity under con- 
trol so as to allow it free scope only so long as savings 
funds can find ready investment in the creation of new 
wealth, but check it or impede it whenever the oppor- 
tunities for such kind of investment become scarce — 
then we would have the means in our hands for prevent- 
ing depressions. Whether a simple and practicable 
means can be found to attain this end — that is a question 
which it is not the purpose of this treatise to discuss. 



CHAPTER VI. 

PROS AND CONS. 

THE primary cause of depressions has, in the previous 
chapter, been traced to the saving process. Many- 
authors have, before this, arrived at the same conclusion 
and have insisted upon the existence of such a connec- 
tion, without, however, succeeding in pro ving it. Their 
arguments were met by such forceful objections and 
counter-arguments that all efforts heretofore made to 
establish that connection, must be considered as failures. 
As matters now stand, the great majority of economists 
are inclined to look only at the bright side of the saving 
process, not at its dark side. The latter, viz., its Impair- 
ing Form, has so far remained unknown, and therefore 
beyond the reach of consideration. Just so with the 
Multiplying Principle, which is a sequence of that Im- 
pairing Form. These two factors known, and their ex- 
istence fully established, the situation is changed, and 
the weak points of the above-mentioned counter-argu- 
ments and objections can readily be discerned. 1 shall, 
in the following pages, enumerate and discuss a number 
of the "objections" above referred to, and shall further- 
more consider some additional ones which, though not 
taken from current literature, will readily present them- 
selves, from the standpoint of the views now ruling, as 
bearing against the Impair-Savings Theory, and I will 
show where they are wrong. 

OBJECTION NO. 1 .- -According to a well-established 
axiom e\ery producer who is willing to sell brings a de- 
mand into the market equalling the value of the goods he 
offers; for instance, if he offers to sell a hundred dollars' 
worth of wheat, he does so with the intention of buying 



90 Pros and Cons. 



a hundred dollars' worth of other goods with the pro- 
ceeds, which would mean a demand to that extent. This 
demand asserts itself not only where he expends the 
money in the usual manner, i. e., buying commodities, but 
also if he saves it and invests it. The investment, no 
matter in what shape it takes place, means buying some- 
thing or other, and therefore means demand. Hence, the 
view that there should be a shortage of the demand when- 
ever the investment assumes a certain form (the Impair- 
ing Form), contravenes the above-mentioned well-estab- 
lished axiom. 

REPLY. — A. demand of some kind may spring up, due 
to the investment; but this need not necessarily be a de- 
mand for working forces — and it is this point which de- 
cides whether there will be unemployment, and event- 
ually depression in trade or not. 

Most economists do not admit this distinction and 
they hold that the demand, irrespective of the shape it 
assumes, will in some way or other lead to the employ- 
ment of working forces 6 . Let us take some examples to 
see whether this view will always agree with the facts. 

Suppose that the man who realized the $100 from the 
sale of wheat expends the money in the purchase of com- 
modities. Then the latter will be reproduced, either in 
the same shape or in some other shape, and this reproduc- 
tion will call one hundred dollars' worth of working 
forces into activity. Such kind of demand, therefore, 
which calls for commodities, is practically identical with 
a demand for working forces. 

Suppose that instead of buying commodities the man 
saves and invests the $100, applying it towards the build- 
ing of a house. This would likewise give employment to 
working forces, no matter whether the money be paid out 
for wages or in the production of building material. So 
the demand ensuing would also be of the desirable kind. 

But if the investment does not take the shape of 
new constructions or extensions or improvements, and 



Pros and Cons. 91 



<.loes not lead to some enterprise that will set working 
forces in motion, and is Dot absorbed in renewals or re- 
pairs — in other words, if the investment takes place in 
that particular shape which is peculiar to periods of de- 
pression — can we still assert that the investment of the 
$100 will create a demand for one hundred dollars' worth 
of working forces? If it does, the manner in which this 
is effected should be explained ; but that has never been 
done by our economists. 

That a demand finally springs up, such as will convert 
the savings funds into goods, remains undisputed. But 
let us consider the conditions under which it arises. 

In the regular course of business each individual's 
demand (i. e., the final demand, either on his part or on 
the part of his family, for purposes of consumption), de- 
pends upon his income — from wages, profits or whatever 
source. And the extent of his income practically repre- 
sents the potentiality of his purchasing power or demand. 
Thus, the wheat-grower referred to above brings a hun- 
dred dollars' worth of demand upon the market only be- 
cause he has earned that much from the sale of the wheat. 
And such earning power must be regarded, from an eco- 
nomic standpoint, as the legitimate source of all demand. 
But is it also the source of the demand where Impair 
Savings intervene? No. Here the individual, as has 
been shown in Chapter III, does not earn the $100 which 
he expends for commodities. The demand which he 
brings upon the market does not originate from his in- 
come but from dire necessity, from the fact that he needs 
food, and clothing, and shelter, in order to live. The de- 
mand arising from this necessity exists quite irrespective 
of his income, and irrespective of the amount of Impair 
Savings accruing in somebody's hands. It would there- 
fore be wrong to assume that the investment of these 
savings funds originates the demand. 



92 Pros and Cons. 

Where the savings funds, when being invested, come 
to the receivers in the shape of income, they create a de- 
mand for working forces, the extent of this demand be- 
ing dependent strictly upon the amount of the savings 
funds. When invested in the Impairing Form, however, 
the act of investment does not create such a demand. 
There is a demand for commodities, but it is not caused 
by the investment. Though the funds finally come to be 
expended for commodities, the money comes to the re- 
ceivers not in the shape of income, but through alienation 
of property or by borrowing — over the bridge of their 
own impoverishment. 

OBJECTION NO. 2.— The argument given in the 
pages just preceding does not prove a minus of demand 
to result from the saving activity, in its so-called "Im- 
pairing: Form." It is a well known fact that savings 
funds, say $100, will, in the course of their investment, 
be finally expended for commodities; then they will call 
not only for goods but also for working forces (to re- 
produce these goods), aDd this represents a demand for 
$100 which offsets the original shortage of demand en- 
gendered by the saving activity, — no matter how the $100 
comes to those who buy the commodities, whether in the 
shape of income or in some other way. If the original 
shortage is compensated for by a final plus, no minus 
can remain. 

REPLY. — Much has been made of the fact that sav- 
ings funds, no matter how they are invested, are finally 
transformed into goods. To test the merit of this con- 
tention, let us resolve the saving process into the three 
phases of which, as a matter of fact, it is composed, and 
note how these several phases vary in their influence 
upon the demand for working forces, according to 
whether the saving process assumes the Capitalistic Form 
or the Impairing — always bearing in mind that (as as- 
sumed above) a demand for commodities is equivalent to 
a demand for working forces' 1 . 



Pros and Cons. i)3 



THE THREE PHASES UNDER THE CAPITALISTIC 
FORM OF SAVING. 

PHASE A — This comprises the saving activity as such. 
As is well understood, the act of saving will, primar- 
ily, tend to create a curtailment of the demand for 
working forces. 

PHASE B — consists of the investment; either in some 
enterprise or in some new construction, say, in build- 
ing a house. Here, the act of investing brings em- 
ployment to working forces, and therewith income, 
thus counteracting the injurious tendency of Phase A. 

PHASE C — consists of the transformation of the savings 
funds into goods. This takes place whenever the 
working forces to whom the money goes by the act 
of investment, expend that money for consumptibles 
and commodities. 



THE THREE PHASES UNDER THE IMPAIRING 
FORM OF SAVING. 

PHASE AA — The saving activity as such; which tends 
to throw working forces out of employment, the same 
as Phase A. 

PHASE RB — The investment; this is effected by the pur- 
chase of capital 2 already existing, say, of a house, 
sold by the owner to meet his living expenses; or, 
eventually, by making a loan on the house. Here, the 
act of investment provides neither employment nor 
income for working forces; hence, the injurious tend- 
ency emanating from Phase AA is not counteracted. 

PHASE CC — The transformation of savings funds into 
goods; this takes place whenever the loan, or the pro- 
ceeds of the sale of the house (which, as premised, the 
owner had to dispose of under the stress of necessity) 
are being expended for commodities. 

Comparing Phase B of the one form of saving with 
Phase BB of the other, we arrive at a striking contrast. 



94 Pros and Cons. 



In the one case the act of investment will create a de- 
mand for working forces; in the other it will not. 

While the savings funds are in both cases finally 
transformed into goods, a vital difference can be observed 
before this transformation takes place. A sum of .$100, 
if invested under the one form' of saving will, as it were, 
create two demands and will call for $200 worth of work- 
ing forces, namely, $100 when the house in question is 
being built and again $100 when the receivers of this 
money (the builders of the house) expend it for com- 
modities — while under the other form only one demand 
arises, viz., whenever the $100 is being spent for com- 
modities. 

Another point of difference, of highest importance, 
comes to light when we consider the following: While 
the investment, under the Capitalistic Form, gives rise to 
two demands for working forces, and while the combined 
process of saving and investing necessitates three de- 
mands (one for the work of the saver, one for the work 
of the builders, and one for the producers of the com- 
modities called for under Phase C) we find, under the 
Impairing Form, only two demands (one for the work of 
the saver and one for the producers of the commodities 
called for under Phase CC) ; but these two demands re- 
quire the participation of three distinct parties (working 
forces) before they can become effective: first, the saver; 
second, the borrower 10 ; third, the producers of the com- 
modities called for under Phase CC. Let us repeat, un- 
der the Capitalistic Form of the saving process (saving 
and investing combined) we find three sets of working 
forces and a demand for each of them ; under the Impair- 
ing Form it likewise takes three sets of working forces 
(the saver, the borrower 10 , and the producers of the com- 
modities) before the savings funds can find their way 
back into the channels of production and trade — but of 



Pros and Cons. 95 



these three sets only two will find a demand for their ser- 
vices, the one set (the borrower) being condemned to 
idleness. 

Where we have three sets of working forces and three 
demands, one for each, there is no occasion for a disturb- 
ance of the equilibrium betwen supply and demand. But 
a disturbance in the labor market is bound to follow 
where, as is the case under the Impairing Form of Sav- 
ing, we have three sets of working forces and only two 
demands between them. 

A disproportion in the labor market, with an undue 
preponderance of the supply, means unemployment for 
part of the working classes, lack of income, lack of pur- 
chasing power, lack of demand for commodities, and 
stagnation in business. 

This disproportion can not be remedied by a different 
distribution of the working forces, or by removing part of 
them to a different country. The presence of these unem- 
ployed working forces, who consume (even though to a 
much reduced extent) without producing, is essential to 
furnish a contingent of borrowers 10 (as per Phase BB), 
this in order to bring the savings funds back into the chan- 
nels of production and trade— otherwise the saving pro- 
cess would assume the Hoarding Form instead of the Im- 
pairing, and matters would be still worse. Though, as 
just stated, the consumptive power of the unemployed is 
much reduced, say, from 100 down to 20, the stepping in 
of the Multiplying Principle (page 43) increases their 
number so as to bring their combined borrowing power 10 
up sufficiently to absorb all Impair Savings. Thus, while 
it may take one set of builders to absorb $100 of savings 
under the Capitalistic Form, in the shape of wages, it 
may take five sets of builders to absorb the $100 under 
the Impairing Form, in the shape of borrowings. 



96 Pros and Cons. 



It should be well understood that the saving process 
will surely cause a dislocation between supply and de- 
mand unless employment be given to working forces 
BY THE ACT OF INVESTING. The mere fact that 
a demand for working forces will spring up later on y 
subsequent to the investment, is not sufficient. 

The basic fact stated in "Objection No. 2" remains 
undisputed, namely: "While the saving of $100 will pri- 
marily create a shortage of demand, there will be an 
equivalent plus of demand, even under the Impairing 
Form of Investment, when in the course of the invest- 
ment the $100 is expended for commodities and trans- 
formed into goods. But our economists are wrong when 
concluding from this fact that the final plus will always 
compensate for the original minus. They overlook the 
possibility that, to obtain the final plus, it may take the 
participation of two sets of working forces, with a de- 
mand for the services of only one of these two sets, leav- 
ing the other set unemployed — as is so often the case at 
times of depression. 

OBJECTION NO. 3.— While it is true that invest- 
ments in new constructions will increase the demand for 
working forces above the normal, a hundred dollars thus 
invested giving rise to two demands of a hundred dollars 
each, as explained in the foregoing pages; and while it 
is true that if the investment takes place in a different 
way, it may call for only one hundred dollars' worth of 
working forces — the latter form of investment should not 
be construed as involving a minus of demand. 

If we turn to ordinary business transactions in the 
line of production and trade, we find there, too, only one 
demand for an equivalent supply, a dollar's worth of 
the one for a dollar's worth of the other, and no- 
body will construe this one demand to constitute a 
minus of demand. Why, then, should we have a minus of 



Pros and Cons. 97 



demand in the case of the so-called Impairing Form of 
Investment, if admittedly every dollar so invested will be 
turned into goods and will call for a dollar's worth of 
working forces? 

REPLY. — The above contention is to some extent 
identical with "Objection No. 2": but the principle in- 
volved is so important, and my deductions differ so much 
from accepted views, that it may not be amiss to analyze 
the subject from various standpoints. 

Above all we have to bear in mind that where the 
supply represents work done, or services rendered by 
working forces, the demand must involve a demand for 
working forces, and not merely for capital goods, other- 
wise it can not constitute an offset for the supply afore- 
mentioned. In order to ascertain how far a demand for 
working forces takes place under the Impairing Form of 
Investment, in contrast with the demand arising in ordi- 
nary business transactions, let us adopt a method similar 
to that used in bookkeeping, where they put the Debit 
on the one side and the corresponding Credit on the 
other; but instead of following up Debit and Credit let 
us ascertain demand and supply, putting the Demand 
for working forces in one column and the Supply thereof 
:n another. By this method we are enabled to compare 
Demand and Supply under the two conditions above re- 
ferred to, i. e., under the Impairing Form of saving and 
investing, as well as where no saving takes place at all. 
In making these comparisons a distinction should be 
drawn between what might be called "active" supply of 
working forces, i. e., where the latter are actually utilized 
— as against an " inactive " supply of working forces, 
where the latter, though standing ready to do the work, 
find no employment and are compelled to remain in- 
operative. 



98 



Pros and Cons. 



ACTIVE DEMAND FOR WORKING FORCES 
COMPARED WITH THE ACTIVE SUPPLY THEREOF. 

FIRST.— UNDER ORDINARY BUSINESS CONDITIONS, COMPRIS- 
ING ONLY PRODUCTION AND CONSUMPTION; ALL. SAVING 
BEING EXCLUDED. 

Demand. 



Supply. 



$100 



$100 



$100 



A, a non-saver, who produces goods worth $100, 

and consumes goods worth $100, will supply 

active working forces to the amount of 

and a demand for working forces to the 
amount of 

B, the individual (or group of individuals) who 
by his work earns the $100 expended by A, 
and in turn expends money for consumpt- 
ibles to the like amount, will supply active 

working forces worth 

and a demand for working forces to the 

amount of $100 

From the above comparisons, which may be continued 
ad infinitum, it will readily be seen that so long as the 
saving process does not come into play there need be no 
minus or shortage of demand, and no dislocation between 
demand and supply, a dollar's worth of the one quite au- 
tomatically giving rise to a dollar's worth of the other. 

SECOND.— WORKING FORCES AS AFFECTED BY THE IMPAIR- 
ING FORM OF SAVING. 

Supply. ! Demand. 

A, a saver who produces and sells goods worth 

$100 (which amount, let us assume, he saves) 
will supply active working forces to the 

amount of $100 

Whnn investing the $100 saved as above 
he buys property already existing, but of 
working forces he buys 

B, the seller of that property and receiver of the 

$100. does not get the money for services 
rendered, his services not being called for 
and remaining "inactive." so the "active" 

working forces he supplies amount to nothing 

When expending the money for con- 
sumptibles he brings into the market a de- 
mand for working forces amounting to $100 

Contrasting the two tables given above, we find that 
while under the conditions set forth in Table No. 1, the 
supply always creates an equivalent demand, and con- 
sumption goes hand in hand with production, represent- 
ing what is termed "productive consumption," Table No. 
2 represents a certain class of "unproductive consump- 
tion"; B, the consumer, being forced to idleness, and his 
services remaining uncalled for, owing to the lack of de- 



Pros and Cons. 



99 



mand in the market. This lack of demand is caused by 
the saving- activity of A, in conjunction with that of many 
other individuals, as explained in Chapter III. While the 
saving activity of A may not directly lead to the forced 
idleness of B, it certainly causes a lack of demand some- 
where and helps to create general market conditions 
which reflect upon B and under which he suffers. 

On further comparing the two tables we find that the 
Impairing Form of Investment, as per Table No. 2, neces- 
sarily calls for two men (or groups of men), the one, A, 
supplying working forces (his own) to the community, 
but buying none from it; the other, B, buying working 
forces without supplying any. So, between these two 
parties (working forces) there is only one demand and 
one active supply. Quite different are the conditions set 
forth in Table No. 1. There we see that A not only sup- 
plies but also buys, and that B not only buys but also 
supplies. So we perceive two demands and two supplies 
on the part of these two men; whereas, under the con- 
ditions as per Table No. 2, only one supply and one de- 
mand can be found to appertain to the two men — which 
means unemployment on the part of B. 

If, to make the comparison complete, we should ex- 
tend this method of investigation to the Capitalistic Form 
of saving, our table would be changed as follows : 



THIRD.— WORKING FORCES AS AFFECTED BY THE CAPITAL- 
ISTIC FORM OF SAVING. 



A, a saver, who produces and sells goods worth 

$100 (which amount he saves) will supply 
active working forces to the amount of 

When investing the money saved as 
above, say in building a house, he creates a 
demand for working forces to the amount of. 

B, the individual, or group of individuals, who 
are employed in building the house, bring 
an active supply of working forces into the 
market amounting to 

When expending this money for con- 
sumptibles, they bring into the market a de- 
mand for working forces amounting to 



Supply 
$100 



$100 



Demand. 



$100 



$100 



100 Pros and Cons. 



Contrasting the outcome of the three tables we find 
that under the conditions represented by Tables No. 1 
and 3 the supply always engenders an equivalent demand 
for working forces; while under the conditions covered 
by Table No. 2 it does not. In the latter case the savers 
sell their goods or their services to "others," but do not 
give "others" an opportunity to earn their money back. 
This class of saving brings upon the market a "lack of 
demand" as a tangible, definite and positive element — a 
fact which fully confutes the position taken in "Objec- 
tion No. o. #%***#*# 

To maintain an equilibrium between the supply of 
working forces and the demand therefor, each man 
(workingman, trader, capitalist &c.) who earns a dollar, 
i. e., who renders a dollar's worth of services to others, 
should buy a dollar's worth of services from others. It 
does not matter whether he buys direct, or through his 
family, or through third parties; nor does it matter 
whether he earns the dollar through handiwork, or brain 
work, in the shape of profits, or of interest, or in any 
other way, all of which should count the same as services 
rendered: the point being that where he earns a dollar 
from the community he should give "others" an oppor- 
tunity to earn the dollar back. He does so if he buys 
commodities, or if he invests the dollar in some enterprise 
or construction, or if he saves it and puts it in the money 
market and subsequently somebody else invests it in some 
construction or enterprise. If not so invested, however, 
and if coming to those "others" in the manner described 
in Table No. 2, the dollar does not buy the services of 
these others by the act of investment. Then a disturb- 
ance of the equilibrium between the supply of working 
forces and the demand for them is bound to ensue. 

OBJECTION NO. 4. — If depressions were due to the 
saving process, the countries most noted for the saving 



Pros and Cons. 101 



habits of their people, like France, should be the ones 
suffering most from depressions and unemployment. The 
reverse is true. As a matter of fact, we find France to 
be the country least subject to depressions and their at- 
tendant disturbances, and possessed of such a high degree 
of wealth as to confirm the commonly-accepted view that 
the most saving nations are the wealthiest. 

REPLY (a). — The foregoing Objection is wrong in 
two respects: first, in losing sight of the difference be- 
tween savings and Impair Savings — a large volume of 
the one being by no means identical with a large volume 
of the other; second, in assuming that the peoples of 
greatest saving propensities are the wealthiest. 

It is not the extent of the saving activity and not 
the volume of surplus earnings which does the harm ; all 
depends upon the manner of investment. In a country 
like the United States the surplus earnings accruing in 
the course of a year may be ten times greater than in a 
country like China, still there may be "too much saving" 
in the latter country, and in the former not enough to 
meet the requirements, i. e., not enough to supply the 
funds needed for new enterprises. Even in one and the 
same country the savings 1 may at one time be quite large 
and still not too large for the country's well-being; at an- 
other time they may be much smaller and nevertheless 
too large to be absorbed to good advantage. In the 
United States the present (1906) rate of Net Savings ac- 
cruing, available for new enterprises, exceeds three bil- 
lions annuaily; yet there would be room for additional 
savings funds if they could be had. Twelve years ago 
(1894) they may not have aggregated much more than 
half of that sum, yet they were too large to be absorbed 
in the Capitalistic Form, i. e., in the creation of new pro- 
ductive capital or wealth, so they were partly invested 
in the Impairing Form, and at once became harmful. I 



102 Pros and Cons. 



repeat, all depends upon the manner of investment as to 
whether the saving activity is beneficial or otherwise, not 
upon the volume of savings. 

REPLY (b). — As to the alleged fact that the most 
saving nations are the wealthiest, we first have to define 
what is meant by a "saving nation," and in this connec- 
tion have to make a sharp distinction between mere saving 
propensity on the one hand and actual saving, i. e., ac- 
cumulating, on the other. Paradoxical as it may seem, 
Tiations of great accumulating power, like the United 
States, are not those of greatest saving propensity; and 
in turn, nations of great saving propensity, like China, 
are not the wealthiest. To demonstrate this let us take 
up various countries and examine the saving propensity 
as well as the accumulating power of the inhabitants. 

Above all others, the French people are reputed for 
their saving habits, these being generally taken as the 
source of their great wealth. But are the French really 
as saving as is commonly assumed? Is not France the 
very birthplace of luxury? And is luxury consistent 
with saving? As a matter of fact we find that the 
wealthy classes in France are, by their very environments, 
required to live up to their means, much more so than in 
other countries, and iu consequence there are but few of 
those huge individual accumulations of wealth, such as 
we see in England and in the United States, and these 
few are mostly in the hands of foreigners. Inasmuch as 
a nation's growth in capital and wealth depends largely 
upon the rich people's savings, and as these do not 
amount to a great deal in France, we find the aggregate 
of the country's internal wealth to be far from what 
should be expected when considering the people's alleged 
great saving power; and the annual increase of that ag- 
gregate is actually slower than in other leading nations. 



Pros and Cons. 103 



This tendency to live up to their means is not nearly so 
conspicuous among the wealthy middle classes of Prance; 
but even here (and to some extent even among the lower 
classes) we find a greater disposition than in other Euro- 
pean countries to keep up appearances, to dress well, to 
dine well, and to iive in well-furnished homes. True, 
they nevertheless show a keen disposition to save; and 
though this disposition largely manifests itself in the 
shape of haggling to get the most value for the money 
(a trait not really identical with "accumulating"), still, 
the accumulation that does take place is principally due 
to the middle classes. On the whole, however, we have 
io conclude that the saving "propensity" is not such a 
marked characteristic of the French people as is gen- 
erally assumed. Though they possess a fair share of this 
propensity, the latter is largely modified by their ten- 
dency towards luxury — the one disposition being the very, 
opposite of the other. 

While France's wealth is commonly attributed to the 
great saving power of the people, facts show that the 
country does not excel in either of the two forms of sav- 
ing stated above — neither in saving propensity nor in 
actual accumulation of internal wealth.* 

A much more pronounced saving propensity than ex- 
ists in France is found in China ; and if such a disposi- 
tion of itself were conducive to wealth, China ought to 
be rich. A_s a matter of fact it is very poor. The saving 



* As is well known, the recent expansion of France's wealth is 
represented largely by the acquisition of foreign values, not so much 
by domestic development; in other words, the surplus earnings of 
the people are to a great extent being invested in foreign securities, 
perhaps more so than in creating new productive property at home. 
It was a fortunate circumstance for the French people to find an 
outlet for their surplus earnings in such foreign investments — an 
outlet which would not have been possible without the intervention 
of a factor which will be explained on page 13<*. Had there been 
no other avenue for the investment of their surplus earnings except 
that afforded by home enterprise, France neither could have attained 
her enviable position in international finance, nor would her domestic 
prosperity be equal to what it is now. 



104 Pros and Cons. 



going on in that country is not of a healthy kind. Such 
individual accumulations as are being made there, hard- 
ly ever find investment in new enterprises or in the in- 
crease of wealth, the opportunities for such kind of in- 
vestment either not existing or not being made use of, 
and practically no new capital being built up except 
where European funds flow in. As a consequence the 
saving process has, long before this, assumed almost ex- 
clusively the Impairing Form* — aggravated, as it always 
is, by the cumulative effect of the Multiplying Principle ; 
and as a result we find in China great poverty of the 
masses, unemployment, stagnation in trade, and a state 
of permanent depression. 

The poverty of that country is generally attributed 
to the lack of labor-saving machinery and to the prim- 
itive state of production. The introduction of labor- 
saving machinery, however, is not encouraged where 
manual labor is abundant and exceedingly cheap. The 
abundance of labor is caused by unemployment and by 
the general lack of demand; this again, as heretofore ex- 
plained, by the saving activity, if it assumes the Impair- 
ing (or eventually the Hoarding) Form — and either of 
these two forms is bound to come into play whenever the 

* Economists generally hold that the saving process in that 
country is of the "hoarding" type. I dare say, however, that old 
hoards are being released and scattered in pretty much the same 
proportion as new hoards are forming, otherwise the money still left 
in circulation would be quickly absorbed and withdrawn. Now, if 
the aggregate of hoards does not increase, the scope of the hoarding 
process going on at present can be but limited. 

On the other hand we have evidence proving the Impairing Form 
of saving to be quite general over there. If Li Hung Chang amassed 
a fortune of fifty million dollars; if this accumulation was not ac- 
companied by an increase of the country's wealth; and if it did not 
consist of money hoards but of useful capital, it follows that his 
style of saving belonged to the Impairing, not to the hoarding type. 
He became rich at the expense of others — by means of a "Change 
of Possession" of property already existing. 

Considering that the Capitalistic type of saving hardly exists 
there at all, and that the hoarding type is quite limited (for the 
reason just stated), and considering further that more or less saving 
is always going on there, it follows that the latter must be princi- 
pally of the Impairing type — a fact which has been graphically dem- 
onstrated in Diagr. 3, which see. 



Pros and Cons. 10t> 



savings do not meet an outlet in the Capital 2 -Producing 
Form. China's poverty, therefore, must he primarily at- 
tributed to the strong saving disposition of its people — 
thus bearing out the point we started with, that nations 
of great saving propensity are not the wealthiest. Were 
the people of China less inclined to save, or were the 
savings invested in new productive enterprises, there 
would be more business and less poverty. 

In contrast with the example of China we find much 
less of a saving propensity in England and the United 
States, but on the other hand a far more rapid accumula- 
tion and a much higher standard of life. Here, the de- 
sire for a higher standard of life tends to create a greater 
demand on the part of the people; this demand stimulates 
production and therewith the formation of new produc- 
tive capital; this, again, affords opportunities for the 
capitalistic investment of savings — which means real ac- 
cumulation and increase of wealth. So the greater ac- 
cumulating power practically depends upon a concurrent 
growth of the buying proclivity of the people. It would 
not exist, were this buying proclivity curtailed by a 
stronger saving propensity. 

Were the degree of saving propensity really the decid- 
ing factor in the accumulation of wealth, then the Dutch 
should be richer than the French, but they are not; and 
they should accumulate wealth much faster than the 
Americans, but such is not the case. 

From these comparisons it follows that the greatest 
degree of wealth is not found in conjunction with the 
highest degree of saving propensity, but that best results 
as to actual accumulation are attained by a judicious 
mixture of a saving disposition on the one hand and a 
desire for a better style of living on the other. 

This desire for a more luxurious style of living, this 
toning down, as it were, of the saving activity, is the in- 



106 Pros and Cons. 



dispensable, and in reality the decisive factor required 10 
ensure prosperous business conditions.* 

OBJECTION NO. 5.— The Impair Savings Theory, in 
so far as it implies that not all of the savings can find 
useful investment, is contradicted by the fact that at all 
times cash funds will command interest in the open mar- 
ket. Business men would not offer interest if they had no 
need of the funds. The principal use, and practically the 
only use, which they make of such funds is to apply them, 
directly or indirectly, to purposes of production ; and 
inasmuch as they can always apply them to that purpose, 
it follows that the opportunities for profitable investment 
in production, or in the capital-producing line, are prac- 
tically unlimited. What is said here of cash funds in 
general will equally apply to such funds as accrue from 
savings. Tn other words, the fact that savings funds will 
always command interest goes to prove that there is no 
lack of opportunities for the investment of savings in 
the lines of production or in the creation of productive 
capital. 

REPLY. — The above argument is based on the as- 
sumption that whenever interest is offered for the use of 
cash funds the borrower does this for the purpose of some 
profitable investment, and that such funds as accrue from 
savings are usually applied in that direction. As a mat- 
ter of fact, however, loans are often negotiated under 
the pressure of straitened circumstances, the proceeds 
going to make good the impairments resulting from a 
shrinkage of income, especially at times of depression. 
If a business man "runs behind," he often has to resort 



* It should be understood, however, that the "judicious mixture," 
referred to in the text, is not the only requirement necessary to en- 
sure prosperous conditions. It may be jeopardized by an unhealthy 
condition of the foreign trade (seepage 135). On the other hand, a 
favorable trade balance (see definition on page 135), such as obtains 
with the French (see page 134) and with the Dutch, will do much 
to alleviate the ill effects of an excessive saving propensity. The 
latter would have tended to make these peoples poorer, had they 
been confined to the home markets for the investment of their sav- 
ings. The favorable trade balance, however, allowed them to partly 
invest their savings abroad, and thus made them all the more 
wealthy. 



Pros and Cons. 107 



to borrowing to cover the deficiency. To class this kind 
of borrowing the same as borrowing for purposes of regu- 
lar business or for purposes of enterprise and extension, 
would be improper. 

In periods of depression a considerable proportion of 
the demand for cash funds comes from the source here 
indicated. As at such times the saving process largely 
assumes the Impairing Form, so that every $100 saved 
by the one entails a loss of income to " others ? ' of per- 
haps $500, it is clear that among those "others" there 
will always be some quite eager to borrow the $100 ac- 
cumulated by the saver, and willing to pay interest for 
the use of that money. And what is true of the individ- 
ual amount of $100 is equally true of the grand total of 
all Impair Savings, even if they aggregate a billion dol- 
lars per annum. So, while the demand for cash funds 
may be there, this does not prove the funds to be wanted 
for purposes of enterprise or of new constructions, or 
of profitable investment. 

If the mere fact that interest is being paid on loans 
were really indicative of business enterprise and prog- 
ress, we should expect to find a very low rate of interest 
in an unprogressive country like China, where but little 
money is absorbed in enterprise and new constructions 
Actually, however, the rate of interest is very high there 
— as much as three per cent, per month not being un 
usual. 

OBJECTION NO. 6. — In contradistinction to the view 
set forth in "Objection No. 5'' many economists hold 
that at times of depression savings funds, and cash funds 
in general, do not find ready employment in new enter- 
prises or in the lines of regular business. Their argu- 
ment would run as follows: The palpable decline in the 
rate of interest clearly indicates an accumulation of idle 
cash funds, although the statistics of the banks and of 
other financial institutions may not reveal the full extent 



10S Pros and Cons. 



of the accumulations. If, as assumed in this treatise, 
cash funds (savings funds) can always find investment in 
the Impairing- Form where they do not find it in the 
Capitalistic, there should be no accumulation in the 
money market and therefore no decline in the rate of 
interest. 

REPLY. — It is true that savings funds if not finding 
investment in the Capitalistic Form will find it in the 
Impairing Form : but not so readily. The opportunities 
for investment are not so inviting. Nobody likes to lend 
money where it is to be used for covering up deficiencies. 
Even where property is for sale, like houses, factories, 
etc., and where it is offered at prices much below the nor- 
mal, buyers hesitate to invest in the face of a stagnant 
or declining market. This hesitancy impresses itself 
upon the money market — we find a predilection for 
sound and safe investments, and a disposition to be satis- 
fied with a low rate of interest rather than to run any 
risk. 

At prosperous times a man may find investment for 
his funds in two ways, first, in new enterprises; second, 
in the purchase of property already existing. At times 
of depression the mode of investment first mentioned is 
greatly restricted and moneyed men will have to look 
chiefly to the other form; high-grade securities which 
yield a fixed return being especially in demand. This 
will tend to enhance the prices of such securities — mean- 
ing a fall in the rate of interest which the funds so in- 
vested will bring. 

A falling rate of interest, therefore, does not confirm 
the conclusion arrived at by many economists as to its 
indicating the existence of huge idle cash funds in the 
money market in excess of the comparatively small 
amounts revealed by statistics. 

OBJECTION NO. 7.— The demand for working 
forces should not be measured altogether by dollars and 



Pros and Cons. 



109 



cents, as has been done on page 98, and all through this 
treatise A thousand dollars expended for luxuries will 
not give rise to an equally large demand for working 
forces as $1,000 expended for common necessaries, the 
production of the latter generally requiring much more 
manual labor. So the gauge used for measuring the re- 
lations between demand and supply does not seem 
reliable. 

REPLY.— Inasmuch as the demand for luxuries will 
of itself include, or at least lead to, a demand for com- 
mon necessaries (as fully explained on page 69), the 
deductions drawn in the foregoing objection are not well 

founded. 

On the whole it is not so important that the savings 
funds should, by the act of their investment, put the 
greatest possible number of men in activity, as that the 
funds be transformed from idle Surplus Funds into 
Active Money: in terms of the Chart: That they be 
transferred from the unproductive circulation of the 
black central field into the channels of industry and trade 
represented by the red ring. So long as they circulate in 
these channels, the purchases of the one mean income 
and business for the other, no matter whether the ex- 
penditures be made for luxuries or for necessaries. 

OBJECTION NO. 8.— No attention has been paid, in 
this treatise, to jn important economic principle inti- 
mately connected with the subject of demand and supply, 
namely, the fact that a demand for commodities primarily 
concerns and rewards past labor, such as was previously 
required in producing the commodities— whereas the 
author treats the subject of demand entirely in its bear- 
ing npon future production. As the future is wholly an 
outgrowth of the past, reliable conclusions can hardly be 
reached where the part played by the past is not con- 
sidered. 

REPLY.— Hundreds of volumes have been written to 
define the relations of present demand to past labor or 



110 Pros and Cons. 



enterprise. Such discussions may have their theoretical 
value but are of no practical avail and would throw no 
additional light on the "neglected point" considered in 
this treatise. 

OBJECTION NO. 9.— The impoverishment of indi^ 
viduals and the consequent alienation of property has, in 
this treatise, been ascribed principally to the saving ac- 
tivity of "others." In most cases, however, the impover- 
ishment, especially on the part of the wealthy, can be 
traced to personal causes. A man may run behind in his 
affairs, because he is hampered by ill-health, or by acci- 
dents, or because he lacks judgment in the management 
of his estate, or goes into losing enterprises, or lives too 
high, sacrificing his future well-being for the sake of 
temporary passions and enjoyments. Whenever the 
wealthy spend more than their income amounts to, their 
subsequent impoverishment is not due to the saving 
activity of others, but to what may properly be classed 
as squandering. 

REPLY. — No doubt the impoverishment of wealthy 
individuals is often caused by their own doings. Were 
we to ascribe to this cause, however, the widespread im- 
poverishment observable at times of depression, we 
might, with as much reason, also ascribe the high degree 
of unemployment, observable at such times, to individual 
causes. The fact that unemployment often can be traced 
to special circumstances of an individual character re- 
mains undisputed. A workingman may be disabled by 
sickness or accident, or he may not attend to his duties, 
or be quarrelsome, or negligent, or lazy, or intemperate, 
and owing to any of such reasons he may lose his em- 
ployment. Nevertheless nobody will deny that if at times 
of dull business large numbers of men are thrown out of 
work, there are general and not individual causes at play. 
Just so with the impoverishment of the wealthy. While 
sporadic cases of "running behind" may often be due to 
squandering, the far-reaching impoverishment observable 



Pros and Cons. Ill 



at times of depression is evidently due to general, not to 
personal causes, and it would be improper to maintain 
that the losers come to grief entirely by their own fault. 

*#***■**# 

A sharp distinction, therefore, should be made con- 
cerning the two factors to which the impoverishment of 
individuals may be due, whether to Squandering, or to 
Impair Savings on the part of others. These two factors 
are very different in their nature and very different in 
their manner of action, and especially so in their bearing 
upon business and upon supply and demand ; the one 
factor stimulating the demand without increasing the 
supply; the other stimulating the supply without in- 
creasing the demand. A spendthrift who wastes his es- 
tate in the purchase of commodities or personal services 
evidently brings more demand than supply into the mar- 
ket, and thus enlivens business. A saver brings in more 
supply than demand, primarily at least, as is well under- 
stood; and if subsequently his savings lead to Impair 
Investments, the act of investment brings no demand 
whatever upon the market, thus leaving an excess of the 
supply. Considering that this shortage of the demand, 
as well as the unemployment resulting therefrom, pos- 
sesses an inherent tendency to multiply, as explained on 
page 43, and considering further that these two elements 
form the very essence of dull business and of depression, 
it is evident that the factor which ushers in these 
maleficent elements will hurt business and the welfare of 
the community far more than the squandering process 
will. 

Much has been made of the point that a squanderer 
destroys wealth, inasmuch as he annihilates some of the 
country's capital and wastes the fruits of other people's 
labor — this being considered equally injurious to the 
country's welfare as the destruction of property by con- 



112 Pros and Cons. 



flagration, floods, etc. We should bear in mind, however, 
that, while the loss of a house by fire will actually des- 
troy the house, and reduce the country's wealth accord- 
ingly, the loss of the house by the act of squandering will 
do nothing of the kind ; it will merely lead to a change of 
ownership, leaving the property itself intact. There may 
be some truth in the further assertion that the spendthrift 
wastes the fruits of other people's labor, inasmuch as he 
lavishly buys and consumes all sorts of commodities, 
especially luxuries. But the fact is, commodities are 
there to be consumed ; i. e., to be destroyed or absorbed 
*by use or consumption. A rich man, although living 
within his means, may use and consume commodities to 
a much larger extent than the spendthrift does, without 
being accused of wasting the fruits of otber people's 
labor — and if his purchases do not constitute a waste of 
the country's wealth, why should those of the squan- 
derer? Were there a dearth of commodities, and not 
enough in the market to meet the demand, then the 
wasteful consumption of the spendthrift (and in fact 
also of the rich"! would leave others short of an adequate 
supply of such commodities as they really need ; but 
where (under normal conditions) our markets are over- 
flowing, and legions of workingmen stand ready to sup- 
ply still more, if the demand existed, and where, on the 
other hand, the prodigality of the spendthrift helps to 
augment the demand for commodities and for working- 
men, it seems entirely out of place to construe his lavish- 
ness as leading to an impairment of the country's wealth. 
Of course, all this is true only within reasonable lim- 
its. If the squandering tendency should spread to a con- 
siderable extent, the money market may be unfavorably 
affected, such cash funds as are needed for enterprises 
and new constructions then being absorbed by dissipa- 
tions, with a resultant dearth of cash capital. It may be 



Pros and Cons. 113 



difficult, however, to cite a single instance where a gen- 
eral dearth of cash funds was traceable to excessive 
squandering, and not to the great demand for purposes 
of enterprise and new constructions. So long as we find 
an ample supply of available cash funds (as is the case 
under normal conditions), the doings of the spendthrift 
will exercise no perceptible influence on the money mar- 
ket; and especially not at times of depression, when a 
lack of cash funds is hardly ever witnessed. 

On general principles squandering is not commenda- 
ble, for it hurts the individual concerned, and obviously 
it would be better that all citizens should live in comfort- 
able circumstances rather than to have any of them re- 
duced to poverty. But the contention that it destroyes 
wealth and wastes the fruits of other people's labor and 
that it depletes the money market to an undue extent — 
all this is based more upon fiction than upon facts. 

OBJECTION NO. 10.— The author considers only 
two forms of investment, the Capitalistic and the Impair- 
ing; and maintains that savings, in order to find invest- 
ment, are confined to one of these two forms. There are 
other ways, however, for employing savings or cash 
funds; for instance, by loaning them out to merchants, 
manufacturers, and others, who make use of them in the 
regular course of their business. 

REPLY. — Let us follow up the various purposes for 
which a merchant may secure a loan, say of $1,000. First, 
he may intend to increase his business; then the loan 
would constitute an investment of the Capitalistic class. 
Second, he may have run behind, thus needing the money 
to make up for his losses ; then the loan would constitute 
an investment of the Impairing class. Third, he may 
borrow the $1,000 to pay off another loan— in which case 
there has been no investment of cash funds at all, the 
$1,000 merely changing ownership when being paid over 
to cancel the old loan, thus remaining "investment- 



114 Pros and Cons. 



seeking" cash capital, though in the hands of a new 
owner. Fourth, he may need the money for temporary 
purposes, to bridge over the busy season — which would 
practically mean an increase of his business, the same as 
just considered under point No. 1, only of a temporary 
character. Whichever way we take it, we would find 
that the funds, if they really meet investment (and not 
merely shift ownership), will find it either in the Capital- 
istic or in the Impairing Form. 

Just so with the alleged " other ways" of employing 
funds. So long as savings, or cash funds, are actually 
available for investment, and are not needed for Replace- 
ment purposes (represented by Lines 12, 13 and 14 of the 
Chart), they practically have only two avenues of invest- 
ment before them, either the Capitalistic, indicated by 
Lines 15 and 16 of the Chart, or the Impairing, indicated 
by Line 17. 

If needed for Replacement purposes (Lines 12, 13 and 
14) they are not available for investment, and therefore 
would not fall within the range of ' ; Objection No. 10." 

OBJECTION NO. 11.— The amount of three billion 
dollars assumed in this treatise as representing our coun- 
try's saving power, is much too large. While, as a rule, 
economists are cautious about naming a definite figure 
as representing, even conjecturally, a country's saving 
power, where there is so little material on which to base 
statistics, the majority of them will hardly feel inclined 
to admit more than one-half or one-quarter of that 
amount. The smaller its aggregate, the less its import- 
ance as an economic factor. 

REPLY. — To some extent the data given by the cen- 
sus reports, indicating a steady increase of the country's 
wealth, should be a guide. Even though these reports 
may contain many errors and irregularities, they ought 
to be fairly correct on the average, and when comparing 
the successive reports with each other they agree well 



Fros and Cons. 115 



enough to merit confidence. And they undoubtedly point 
to the larger figure rather than to the smaller one, not- 
withstanding the fact that some of the increase repre- 
sents mere appreciation in market value which has noth- 
ing to do with the saving process. Take, for instance, the 
decade from 1880 to 1890. This period certainly was not 
characterized by an inflation of market values. Still our 
country's wealth increased from 13 billion dollars in 1880 
to 65 billions in 1890, showing an annual augmentation of 
over two billions, in the shape of actual, tangible prop- 
erty, no paper values included. This increment of wealth 
represents saving power to the like amount, excepting a 
few items which in their aggregate do not make up a 
large share of the total.* In 1890 the saving power was 
greater than in 1880, and hardly less than two billions 
per annum. For the boom period of 1905, 1906 and 1907 
where the country's population, earning power and re- 
sources had wonderfully increased, the assumption of an 
amount like three billions annually does not seem out of 
place 

Another guide may be found in the extent of the an- 
nual issue of new securities. According to the compila- 
tions of the New York Journal of Commerce the total of 
the issues "authorized" for the first nine months of 1907 
came to 1733 million dollars, and the total of the secur- 
ities really issued during that period to 1025 millions — 
of which amount about one-third has been estimated to 
represent mere refunding or conversion operations, the 
remaining two-thirds constituting new capital such as 

* These items principally consist of the following: first, the small 
appreciation in the market value of the property existing- prior to 
1880; second, the property built up with funds procured by the ex- 
pansion of credit money, i. e., bank notes and bank credits (bank 
loans, "money in bank"), which funds do not represent savings; 
third, our borrowings abroad, represented by the growth of foreign 
indebtedness, the latter being no more than one billion at the ut- 
most, for the whole decade. All of these items may not foot up more 
than a quarter of the total increase of tangible wealth reported by 
the census; perhaps not more than a sixth. 



116 Pros and Cons. 



will absorb the funds of the money market and which 
must be supplied principally by the saving process. Fig- 
uring a full year instead of nine months, the total may 
come up to 900 millions.* This figure, large as it is, com- 
prises only the issues of railroads and of industrial com- 
panies wbere each issue reaches a million dollars or more. 
Considering that the great majority of issues consist of 
amounts of less than a million ; considering further that 
many other large corporation issues are made in the min- 
ing, navigation, banking and commercial lines — the said 
annual increase of nine hundred millions ought to swell 
considerably. The municipalities alone borrowed 200 
millions from January to September, 1907. Bearing fur- 
ther in mind that all wealth in the United States owned 
by corporations has been estimated at 35 billions, or one- 
third of the country's aggregate, and knowing that not 
only corporate wealth is increasing but also that much 
larger share which is held by individuals, such as we find 
in the lines of agriculture, commerce and industry and in 
the possession of all employed persons — it seems proper 
to put down the present annual increase of capital and 
wealth at not less than four billion dollars, the bulk of 
this representing saving power. 

American economists have not paid much attention to 
the great extent of our country's annual increment of 
capital. A prominent French economist, however, has 
estimated the latter to come to 2,000 or 2,500 million dol- 
lars per annum at the present time.+ Suppose the saving 

* For the full year of 1906 the railroads alone show an increase 
of capitalization (bonds, stocks, etc.) of about $SOO,000,000. 

t Strange to say, while computing our country's annual capital 
requirement at 2,000 to 2,500 million dollars, that French economist 
puts the saving power at only 600 millions — holding that the balance 
must be procured from abroad. A strange idea, indeed, revealing 
a considerable degree of confusion as to the source of capital. If 
we had to borrow from 1,400 to 1,900 millions from Europe in a single 
year, where would we come to in course of time? Our total indebt- 
edness to Europe, accumulating for the whole of the last century, 
has never been estimated higher than 2,500 millions! 

Again, in what shape could such a huge amount of capital, a 
billion or more, be transferred from Europe to America? In the form 



Pros and Cons. 117 

power were only that much. And suppose that at a time 
of depression one-third of that amount of savings were 
unable to find investment in the beneficent Capitalistic 
Form ; as it were, that savings funds to the extent of 750 
millions had to find investment in the Impairing Form; 
this would mean a direct impairment of income on the 
part of the people to the same extent. But by the step- 
ping in of the Multiplying Principle, as explained on 
page 43, that amount may be augmented fivefold, or 
more, and thus may fully account for the extensive loss 
of income which we witness during depressions. Conse- 
quently, it would not prove much against my theory if 
instead of three billions, the country's annual saving 

Of merchandise — where statistics show the reverse, a large excess not 
of imports but of exports? Or in the form of money? I have shown 
on page 29 that either form is out of the question for effecting a 
transfer of such magnitude. Can it be done by the mere instru- 
mentality of foreign exchange? According to prevailing views, yes. 
Suppose a New York banker, A, negotiates a loan of a million dollars 
with a bank in Paris; the latter telegraphs Morgan & Co. in New 
York to pay that amount to A; all this may be done within a few 
hours, and the transfer is apparently consummated. 

But is it really consummated? Does not the payment merely 
represent part of the transaction? The mere shifting of funds from 
one New York banker to another New York banker — funds which 
were already in New York, either In the possession of Morgan or 
of Morgan's bank — that does not end the matter. The real transfer, 
from Paris to New York, will be made when Morgan and the Paris 
bank come to settle with each other. Then it turns out that unless 
foreign trade (understood in its broad sense, see page 135) leaves a 
balance to allow of such exchange transactions, the latter must be 
made good by means of gold shipments. To presume that over and 
above the limit drawn by the trade balance an amount like a billion 
dollars, or even the tenth part of it, can be transferred by mere ex- 
change transactions would be preposterous. 

Nor can new capital be procured by withdrawing it from old In- 
vestments, though many believe it can. Suppose a man has in- 
vested his capita! of $100,000 in building a factory and that he needs 
$10,000 additional cash for going into some new enterprise. Can he 
withdraw this money from his factory? No. He may mortgage the 
latter and thus raise the $10,000; then the new capital comes from 
the lender of the money, not from the factory. Or he may obtain the 
$10,000 out of the profits accruing from running it; in this case the 
money comes from his earnings and from what he saves out of the 
latter, but is not withdrawn from the capital originally invested in 
the factory. 

As a matter of fact the cash capital required for building fac- 
tories, railroads and other productive capital must be supplied by 
the saving process, excepting only the funds coming from the 
expansion of credit money and those derived from abroad (see foot- 
note on page 115). 

I have dwelt on these subjects at some length because consider- 
able misconception seems to prevail as to the source of capital, not 
only on the part of the economist referred to, but of others as well. 



118 Pros and Cons. 



power were only halt that sum, or still less; and whether 
the Impair Savings come to a billion dollars or only to 
half that much. Either sum may be swelled to a very 
large total by the intervention of the Multiplying Prin- 
ciple, and may thus become an economic factor of suffi- 
cient importance to fully account for the phenomena 
which we witness in times of depression. 

OBJECTION NO. 12.— The Impair Savings Theory is 
built up on two assumptions, first, that anexcess of sav- 
ings, over and above what the author styles "Capitalistic 
Savings," really exists; second, that these Excess Sav- 
ings work injury to the community and thus become 
Impair Savings. The existence of such "Excess Sav- 
ings" is open to question, so long as not substantiated 
by statistical material. Indeed, some economists believe 
that savings can almost always find investment in enter- 
prise and new constructions and that, if at times of de- 
pression a lull in new constructions takes place, this is 
due to a lack of savings funds, not to a lack of opportun- 
ities for the "Capitalistic" kind of investment. If so, 
there could be no Excess Savings, and without these there 
can be no Impair Savings. Unless the existence of 
"Excess Savings" be fully established, the Impair Sav- 
ings Theory has no real foundation. 

REPLY. — Thouerh it may be difficult to produce statis- 
tical material bearing on the subject, still the existence of 
Excess Savings can be proved by a chain of definite facts, 
as follows: 

PKOOF POINT 1. — At present, during the depression 
of 1908, many individuals and business firms are "run- 
ning behind," expending more money for their current 
expenses than they earn; this "running behind" being 
caused, not by extravagance, but by a shrinkage of their 
income, and this shrinkage, in turn, being due to lack of 
employment resulting from general market conditions. 
For example, the Erie Railroad is "running behind" at 
the rate of much over a million dollars per annum, where 
before the panic it earned a surplus. 



Pros and Cons. 119 



PROOF POINT 2.— Suppose these "Excess Expendi- 
tures" amount to a billion dollars (or any other sum) to 
which extent the said individuals or concerns — let us call 
them ' ' The Impaired ' — are getting poorer. If The Im- 
paired consume a billion dollars' worth of commodities 
(or services) more than they produce, there must be 
others in the community, savers, who produce a billion 
dollars' worth of commodities in excess of what they 
consume. Either this, or the stock of commodities, kept 
en hand by the dealers, must run down; but as we had no 
accumulations of stock before the panic; and as at pres- 
ent (summer months of 1908) stocks everywhere have 
already run down to a minimum ; any further shrinkage 
of the stock of commodities is practically impossible, so 
the fact remains that any further Excess Expenditures 
on the part of The Impaired indicate an equivalent 
amount of savings on the part of others. These savings 
represent what I have styled "Excess Savings." 

PROOF POINT 3.— If The Impaired expend more 
money than they earn, how do they obtain the money? 

It comes from the savers, and reaches them over the 
bridge of their own impoverishment, either in the shape 
of loans, or in payment for property which they have to 
alienate. Suppose some of The Impaired be workingmen, 
unemployed, who draw on their deposits in the savings 
bank ; the latter, in order to procure the money, will have 
to sell some of its securities; and if the savers mentioned 
in Point 2 buy these securities, their savings funds come 
into possession of the unemployed workingmen — not in 
the shape of income but in payment for the securities 
alienated by them (or by their bank). If instead of the 
unemployed workingmen we consider the case of a busi- 
ness concern, say, the Erie Railroad, we find here, too, 
that the money the Railroad expends in excess of its 
income must come from others; presumably in the shape 



120 Pros and Cons. 



of loans; or by leaving accounts unpaid, which amounts 
to the same thing as contracting loans or debts. 

Whether the billion dollars consumed in Excess Ex- 
penditures comes, directly or indirectly, from the billion 
of Excess Savings referred to in Point 2; or whether 
some of these savings funds stay in the money market, 
and other funds, already in the money market, go to The 
Impaired to pay for their Excess Expenditures, that is 
immaterial. Practically we are justified in saying that 
the billion of Excess Savings, accumulated by the savers, 
find their investment, by providing for the Excess Expen- 
ditures of The Impaired — to whom the money goes, not 
in the shape of income, but over the bridge of their own 
impoverishment. 

PROOF POINT 4.— The Excess Savings referred to 
in Point 2 (represented by Line 11C of the Chart, see 
also Diagram 2) are made in addition to the Capitalistic 
Savings (Line 11B) and are by no means identical with 
these. The latter, when invested, are expended for new 
constructions, and go to the working forces in the shape 
of income, for services rendered. They neither cause 
unemployment, nor do they go to the unemployed, or to 
The Impaired. 

PROOF POINT 5. — If no Excess Savings were made ; 
if that billion of dollars referred to in Point 2 were not 
accumulated in the shape of savings but were spent by 
the owners for luxuries, that billion would go to the 
working forces in the shape of income, for services ren- 
dered. Then the class of The Impaired would disappear. 
There would be no Excess Expenditures, due to general 
market conditions, for people would earn the money they 
expend. There would be an equilibrium between the de- 
mand for working forces and the supply thereof, and the 
depression would cease. It may not be apparent how an 
enlarged demand for luxuries will benefit all of the work- 



Pros and Cons. 121 



ing forces, now wholly or partly idle; for instance, what 
advantage the Erie Railroad would derive therefrom. But 
the manufacturers of luxuries, when expending their 
earnings, would set other working forces in motion and 
this, owing to the well-known law of action and reaction, 
would react favorably upon all working forces in the 
community, including the Erie Railroad. 
******** 

Granting the fundamental point of the foregoing 
argument, namely, that Excess Expenditures (as defined 
in Proof Point 1) really exist at times of depression — a 
point which economists cannot reasonably dispute — the 
conclusion follows, with absolute certainty, that Excess 
Savings must be made concurrently, and to an equivalent 
extent, and these must be made in addition to the "Capi- 
talistic" and the "Replacement" Savings. Excess 
Expenditures on the part of some, and Excess Savings 
on the part of others, go hand in hand, inseparably. And 
of these two elements the latter is the governing one, as 
shown in Proof Point 5. Without Excess Savings there 
would not be that "lack of demand" for working forces, 
nor would there be that forced "running behind" and 
impoverishment on the part of "others." The fact that 
Excess Savings lead to such injurious results, gives them 
their character as Impair Savings. 

******** 

In addition to the positive proof contained in the fore- 
going argument we could adduce a number of points of 
circumstantial evidence showing that the standpoint 
taken in Objection No. 12 is untenable. Let us cite some 
of these points, as follows: 

CIRCUMSTANTIAL POINT 1.- Though some of our 
economists may share the view evolved in Objection 12, 
that there can never be any superfluity of savings, the 



122 Pros and Cons. 



great majority of them agree on the fact that more sav- 
ings accrue at times of depression, than can find invest- 
ment in enterprise and new constructions, for the time 
being. They arrived at this conclusion, not through mere 
bias, but after duly weighing the facts and circumstances 
bearing on the matter. In other words, they believe that 
class of savings to exist (temporarily at least) which I 
have called Excess Savings. 

CIRCUMSTANTIAL POINT 2.— Not only at times 
of depression but also at normal times many investments 
are continually being made abroad, even where the secur- 
ity may not be of the best; for instance in the construc- 
tion of railroads in China, Turkey, South America, 
Africa, etc., and, particularly on the part of the French, 
in the constant acquisition of foreign securities. This 
clearly reveals the fact that the opportunities for invest- 
ment at home do not keep pace with the increment of 
cash funds and that the latter accrue faster than they can 
be absorbed and employed to advantage in the home 
market — thus demonstrating the existence of an excess 
of savings. 

If, then, we find an excess of savings even at normal 
times, we should not doubt their presence at times of poor 
business, considering that then the opportunities for the 
Capitalistic Form of investment are becoming quite 
scarce. 

CIRCUMSTANTIAL POINT 3.- In countries already 
well developed and teeming with all kinds of capital in 
the lines of industry, agriculture, transportation, etc., 
there should be more production of commodities, more in- 
come on the part of the citizens, and consequently more 
saving power than in new countries undergoing rapid 
development, where, owing to the less efficient means of 
production, the output of the working forces can not be 



Pros and Cons. 123 



so great. Nevertheless the greater saving power in the 
old country does not produce the results which we might 
expect in the shape of accumulation of tangible wealth, 
this being generally larger (per capita) in the new coun- 
try. Thus we find, in the well-developed country, a 
higher degree of saving power coupled with a smaller 
aggregate of the fruits of saving— showing clearly that 
a part of the savings must find investment in a way not 
leading to the augmentation of wealth; in other words, 
that there must be an excess of savings — Impair Sav- 
ings — due to the lack of opportunities for Capitalistic 
Investment. 

CIRCUMSTANTIAL POINT 4.— If we were to be 
governed by the time-honored proverb, "By their fruits 
you shall know them," we would have to conclude that 
Impair Savings exist, because the conditions exist which 
they naturally will engender. If we know that Impair 
Savings will cause unemployment, lack of demand, and 
depression in trade, and if at times we find precisely these 
conditions to prevail without being able to trace them to 
any other source that will bear investigation, the exist- 
ence of Impair Savings seems to be indubitably proven. 



Let us recapitulate the conclusions arrived at in dis- 
cussing the twelve "Objections" advanced in the fore- 
going pages. 

FIRST. — Though the investment of savings funds will 
always engender a demand, this need not necessarily be 
a demand for working forces. 

SECOND.— Though savings funds, in the course of 
their investment, will finally be expended in buying com- 
modities, and though this will, in turn, create a demand 
for working forces, such demand may not compensate for 



124 Pros and Cons. 



the primary minus originated by the saving activity. A 
"lack of demand" is bound to result if the act of invest- 
ment does not call for working forces. 

THIRD.- -While in the regular course of business pro- 
duction and consumption go hand in hand, the producer 
being also a consumer (he or his family), such is not the 
case where Impair Savings intervene. There, production 
and consumption are no longer united, and we find on the 
one hand working forces which produce without con- 
suming, on the other hand such as, through enforced 
idleness, consume without producing. 

FOURTH. — The nations of greatest saving propensity 
are not the wealthiest. Best results are attained by a 
proper mixture of saving propensity on the one hand and 
a disposition for the enjoyment of wealth on the other. 

FIFTH. — The fact that savings funds (cash funds) 
can at all times find interest-bearing investment does not 
prove that by such investment the funds are absorbed in 
enterprise and new constructions, or in the promotion of 
the country's wealth. 

SIXTH. — The decline of the interest rate, at times of 
depression, does not prove the existence of huge accumu- 
lations of idle cash funds. 

SEVENTH. — The point raised by some authors that 
the demand for working forces should not only be meas- 
ured by the amount of money involved, but also by the 
class of demand, whether for luxuries or for necessaries, 
does not seem to be well founded. The demand for 
luxuries will, indirectly, involve a demand for neces- 
saries. 

EIGHTH. — While the purchase of commodities (for 
purposes of consumption) will primarily reward past 
labor and enterprise, it will also stimulate future pro- 



Pros and Cons. 125 



duction. The latter function is by far the more important 
one and in fact the only one which determines the trend 
of business, whether brisk or dull. 

NINTH. The impoverishment of wealthy individuals 

frequently has its origin in general conditions beyond the 
individual 's control, though usually ascribed to personal 
causes, squandering, etc If really due to squandering, 
this does not inflict upon the community those baneful 
consequences which most authors speak of, and which are 
based upon erroneous suppositions — upon conditions 
which do not exist. As a rule the squanderer harms only 
himself, not the community. 

TENTH. — It may seem that there are numerous ways 
of investing savings or cash funds outside of the Capital- 
istic Form (represented by enterprise and new construc- 
tions) and outside of the Impairing Form (described in 
this treatise) ; but there are practically none excepting 
only those indicated in the Chart by Lines 12, 13 and 14, 
see page 36. 

ELEVENTH. — Whether our country's saving power 
amounts to something like three billions per annum, as 
assumed in this treatise, or to a much smaller amount, 
that does not give much of a guide for measuring the 
extent of the harm which possibly can be caused by the 
saving activity whenever it assumes the Impairing Form. 
Most of the harm is brought about by the intervention of 
the Multiplying Principle. 

TWELFTH.— The fact that "Excess Savings" really 
exist — an assumption which forms the basis of my entire 
argument — though hardly susceptible of proof by direct 
statistical data, can be amply demonstrated by positive 
as well as by circumstantial evidence. 



CHAPTER VII. 

VARIOUS FACTORS AFFECTING 
PROSPERITY. 

WHILE prosperity is bound to wane whenever the 
saving activity assumes the Impairing Form to 
any ]arge extent, I do not wish to be understood as main- 
taining that this factor is the only one which may under- 
mine prosperity. In reality the latter depends upon a 
number of factors, all of which must co-operate, and the 
absence of any one of them may cause business to lan- 
guish. To go over the entire field and thoroughly inves- 
tigate all these various factors would lead beyond the 
limits of this treatise. On the other hand, a crisis theory 
would hardly be regarded as complete, or even accept- 
able, if it ignored these factors altogether, and I there- 
fore deem it approprate briefly to consider them. 



THE MONEY SUPPLY,— The relation of this factor 
to economic disturbances has been dealt with to same ex- 
tent in Chapter 1, but its importance justifies further 
consideration. 

It does not seem that the kind of money, whether 
gold, silver or paper (even inconvertible paper) matters 
much in determining whether business conditions shall 
he prosperous or the reverse. The United States got 
along very well with inconvertible paper money in the 
decade preceding the panic year of 1873, better than 
England did with its gold standard ; the merit of a sound 
monetary system apparently consisting chiefly in its com- 
mercial convenience. Much more important is a supply 



Various Factors Affecting Prosperity. 127 



of money adequate to the country's needs, and it seems to 
be particularly the case that any drain which will reduce 
the supply below this requirement will work mischief. 
Such a drain may take place in various ways, and may 
be either an actual one, where the coin leaves the coun- 
try or the circulation ; or it may be a relative one, brought 
about by depreciation. At the time when Home drained 
its dependencies in the shape of annual tributes, those 
dependencies withered. In modern times a tendency to 
drain the weaker countries of their cash is often brought 
about by foreign trade, but is met by the issue of incon- 
vertible paper money, which renders the currency unfit 
for exportation — an expedient which, though not fully 
sufficient for maintaining that "adequate money supply" 
which constitutes one of the elements necessary to pros- 
perous conditions, is certainly the next best thing to it. 

There is a peculiar kind of drain, however, which 
has been steadily uoing on for the last ten years and 
which can not be met so easily as the one just mentioned. 
I mean the depreciation of money — a subject that has 
hardly received the attention it deserves. Not the depre- 
ciation that attaches to paper money, if inconvertible, or 
if issued to excess, but the depreciation of the sound 
money, of the gold itself, as indicated by the constant 
rise of all wages and prices. A certain total of the money 
supply may be adequate to carry on a country's business 
at a certain level of wages and prices, but not at a higher 
level, and if nevertheless the level rises, this would act 
practically the same as a drain on the money volume. 

An artificial drain of this character goes on especially 
at times of prosperous business. At such times the work- 
ingmen, always struggling to obtain higher wages, are 
helped by the greater demand for labor, and they largely 
succeed in their endeavors. This means greater cost of 
production and this again higher prices of commodities 



128 Various Factors Affecting Prosperity. 

— a result which is still more aggravated by the action 
of the trusts in keeping up high prices and suppressing 
competition. Gradually the working classes find that 
the advantage gained from the higher wages is slipping 
away, owing to the increased cost of living, and to rem- 
edy this, they will again contend for higher wages. In 
consequence of this process more money is needed to 
carry on the country's trade and traffic, as has been 
strikingly illustrated by recent experience in the United 
States, where, in spite of the immense augmentation in 
the volume of money, there was so much of the latter 
absorbed in the regular channels of trade that a continu- 
ous paucity of cash funds was witnessed in the money 
market, so much so as to keep the latter constantly on 
the verge of a collapse. Under such conditions some 
circumstance, trivial in itself, may prove sufficient to 
shake confidence, and bring about the collapse, thus ush- 
ering in crisis and depression — which might have been 
staved off for years but for the disturbing influence of 
the enforced rise in wages and prices. A high protective 
tariff which prevents the leveling influence of foreign 
competition makes matters worse. 

Here we arrive at a peculiar interplay of conflicting 
tendencies. On the one hand, prosperity tends to create 
an artificial drain of the money supply, inasmuch as it 
favors the rise of wages and prices and thus depreciates 
the money in circulation; on the other hand, this arti- 
ficial drain tends to undo prosperity, or at least en- 
danger its continuance, by injuriously affecting one of 
its essential conditions — an adequate money supply. 
******** 

History shows us a strange adaptation of a country's 
monetary requirements to its actual supply of money. In 
modern times, and especially in recent decades, the sup- 
ply has increased enormously, but (except at times of 



Various Factors Affecting Prosperity. 129 

depression) we do not find any part of it superfluous, all 
of it being absorbed m the circulation — apparently from 
the reason that wages and prices are always being pushed 
up to (or near) the limit which the money supply will 
permit. While tbis automatic adaptation of wages and 
prices to the country's total money volume exercises a 
stimulating influence on business activity so long as the 
supply keeps on increasing, it has the opposite effect if it 
diminishes, as we have seen in the case of Rome's prov- 
inces. In such an event wages and prices needs must ad- 
just themselves to correspond with the shrinkage of the 
supply, and must come down to a lower level; but the 
transition process is a painful one, engendering severe 
struggles and bitter controversies before workingmen 
accept the lower wages and business men the lower 
prices. And as a rule it can not be accomplished without 
the intervention of depressions or economic disturbances. 
Adjustments of this kind (whether of a depressing 
character if for the lower, or of a stimulating character 
if for the higher) have always gone on wherever the laws 
of supply and demand have had free scope so as to allow 
of proper competition. Within recent years, however, 
two new elements have sprung into prominence, tending 
to counteract the operation of natural forces — the unex- 
pected power attained by the labor unions on the one 
hand and by industrial combinations (trusts, etc.) on the 
other — powers which have proved fully capable of en- 
forcing a steady rise of wages and prices without the 
least concern as to whether the country's money supply 
is sufficient to meet the enlarged demands thereby im- 
posed upon it. This unceasing and seemingly irresistible 
struggle for higher wages and prices which has gone on 
for a decade, and which, as stated, has been equivalent 
to an artificial drain upon the country's currency 1 vol- 
ume, tended to contravene one of the conditions essential 



130 Various Factors Affecting Prosperity. 

to prosperity, namely, an adequate money supply. Of 
late years the latter has been largely augmented by arti- 
ficial means, notably in the United States, in the shape 
of an expansion of bank money 5 . This expansion has been 
large enough to fully meet the increased demands made 
i;pon the money volume. But the expansion could not go 
on forever, inasmuch as it was breeding troubles of its 
own. Then the law asserted itself that the demand upon 
the money supply must keep within the limits of the 
money volume — a collapse ensued which made an end, 
for the time being, to the aggressions of labor unions and 
trusts and to their endeavors for higher wages and prices 
— a collapse which probably would not have taken place 
but for the doings of these two factors. 

I repeat, an adequate money supply is one of the es- 
sentials of prosperity. Though business conditions will 
gradually adjust themselves to a change in the money 
volume, the process of transition means economic dis- 
turbance whenever the change takes place in the shape 
of a shrinkage of the volume- -no matter whether the 
shrinkage is a positive one, in the form of a drain upon 
the gold supply, or an artificial one, in the form of de- 
preciation, i e. a diminution of the purchasing power of 
a gold dollar. 

INDUSTRY. — Obviously, this is an essential of pros- 
perous conditions. In a community of lazy negroes who 
shun work, we will not find business activity nor any 
wealth to speak of. But while industry is essential to 
prosperity, it will not of itself insure it, as is shown by 
the example of China, whose people are very industrious, 
but nevertheless very poor. It is well understood that 
in order to attain best results in the lines of industry 
and production it takes more than mere physical exer- 
tion, and that the latter must be supplemented by proper 
means of production, machines, factories, railroads, etc. 



Various Factors Affecting Prosperity. 131 



On the other hand, history tells us that even in olden 
times periods of prosperity have existed now and then in 
spite of the primitive means of production, whereas in 
modern times depressions are by no means uncommon, 
notwithstanding the multiplication of appliances de- 
signed to aid production. 

In leading countries we find no lack of industry nor 
of the productive capital required to obtain best results 
from it; but we generally do find a lack of opportunities 
for industry to display its full powers, and to keep all 
working forces employed. At times, exceptional condi- 
tions may prevail where this rule does not hold true, as 
was recently the case in the United States and in Ger- 
many; but it is well understood that such exceptional 
conditions will not last and that sooner or later the high 
tension will relax. Then we will see normal conditions 
return: industry will suffer from the want of an active 
market, and part of the working forces, though willing 
to work, have to remain idle. 

ENTERPRISE. — This element, too, constitutes one of 
the essentials of prosperity, though it is not quite so far- 
reaching in its influence as generally assumed. Many 
economists consider it to be the leader, the moving force 
in the march of progress and of business activity. As a 
matter of fact, however, it is as often the follower as the 
leader. All depends upon circumstances and conditions. 
Where these are favorable, and offer a reward to enter- 
prise and new undertakings, the latter will not be lack- 
ing : where they are unfavorable, enterprise can not turn 
the tide, and. of itself, bring about prosperity. Let us 
cite some illustrations. 

The building of a railroad through an unsettled terri- 
tory in the United States, with the expectation of a sub- 
sequent influx of settlers, who will build cities and vil- 
lages, till the ground and establish industries, may seem 



132 Various Factors Affecting Prosperity. 

to be a clear case showing, how enterprise leads and, ot! 
itself, brings business activity and prosperity into a wil- 
derness. But does not enterprise, even here, follow cir- 
cumstances and conditions, and would the railroad have 
been built unless the circumstances had been favorable 
enough to warrant it? In contrast herewith let us con- 
sider a case where the favorable conditions are doubtful. 
Let us suppose that some twenty or thirty years ago na- 
tives of China had contemplated the building of a rail- 
road in their own country through a thickly-populated 
territory, where, from a European point of view, the suc- 
cess should have been immense — was it lack of enterprise 
which restrained them from going into such an under- 
taking? Hardly. They knew they would not succeed. 
They knew they would be sure to fall victims to the ex- 
actions of their corrupt officials and to the likin system 
which harries all traffic in China. Let us assume, as a 
third illustration, that a foreign power would give pro- 
tection to the building of a railroad in China; then we 
will see enterprise come forward at once and capital flow 
in — simply because the conditions of success which were 
absent in the former case are now at hand. 

We could cite many other instances to show that en- 
terprise can thrive only where the conditions of success 
are pre-existent. In a new country like the United 
States, which offers many opportunities for new under- 
takings, unhampered by lawlessness or other drawbacks, 
there enterprise flourishes. In old countries, whose op- 
portunities have largely been seized on already, the field 
for enterprise is much more restricted, consequently prof- 
itable openings are, to quite an extent, sought for abroad. 
Again, opportunities for enterprise become scarce during 
periods of depression ; it is well known that at such times 
enterprise will not avail and is bound to lag. 

Enterprise must be regarded as the antidote, or really 



Various Factors Affecting Prosperity. 133 

as the preventive, of Impair Savings, and therewith of 
depressions. On the other hand, the latter (Impair Sav- 
ings) act also as a preventive of the former, the one 
tending to exclude the other. Where enterprise is suf- 
ficiently active to absorb all the savings of a country, 
there is no room for depressions. Where it does not ab- 
sorb all of them and where, consequently, a portion will 
become Impair Savings, the latter will at once do their 
part to subdue enterprise — since they curtail consump- 
tion (as explained in Chapter 3), therewith production, 
therewith the demand for the means of production (fac- 
tories, railroads, constructions of any kind), and there- 
with enterprise, the latter deriving its support princi- 
pally from the demand for new constructions. Enterprise 
thus being compelled to slacken its pace, the formation 
of Impair Savings (i. e., of funds not used for new con- 
structions) will grow in proportion, and this in turn will 
tend to check enterprise still more, eventually almost 
stifling it, as is so painfully evidenced by unprogressive 
countries like China and India. 

Enterprise no doubt constitutes one of the factors es- 
sential for a country's prosperity, and the peoples most 
alert in this direction count among the wealthiest. But 
I repeat, it is not nearly so much of a primary factor as 
ordinarily supposed, being itself dependent upon the ex- 
istence of favorable opportunities and, to a large extent, 
upon the absence of Impair Savings. 

FOREIGN TRADE.— This, when in a healthy state, 
certainly constitutes one of the essentials of prosperous 
conditions. But on the other hand it harbors the possi- 
bility of peculiar complications. Though in the main 
beneficial to all parties concerned, it does not benefit all 
nations aiike In its highest conception foreign trade is 
considered a refined species of barter, and if it were 
nothing but that, no complications would result. But the 



134 Various Factors Affecting Prosperity. 

foreign transactions do not always offset each other in 
the shape of goods or servjees; there are residual bal- 
ances, and these may pile up from year to year, thus giv- 
ing rise to the development of so-called debtor and cred- 
itor nations. The latter are always growing wealthy and 
evidently are getting the better end of the bargain. 
Debtor nations may likewise be benefited in spite of be- 
coming indebted, provided they are thereby enabled to 
bnild up new 'productive capital at home, as is the case 
with newly settled countries. But where, as in the case 
of Russia, a country becomes indebted simply because it 
is too weak to successfully compete with foreign nations 
and because it is unable to hold its own in its trade with 
the outside world, there the complications referred to 
may actually set in, and may lead to poverty, to a weak 
economic condition, and to chronic financial embarrass- 
ment. 

Such debtor countries gradually have to increase 
their exports as against their imports, the annual excess 
representing the tribute they pay to the outside world 
owing to their indebtedness — this as a sequence to the 
fact that at some period of the past their exports were 
not large enough to balance their foreign accounts. 

A conspicuous example showing how the annual 
residual balances of foreign trade may pile up to an en- 
ormous amount in the course of many years, is given us 
by France, which is said to own more than 5 billion dol- 
lars' worth of foreign securities. To attribute this stu- 
pendous accumulation of credits entirely to the course of 
her foreign trade, may, at first sight, seem absurd, but is 
undoubtedly correct. How did France pay for those se- 
curities? For the one or the other of the individual loans 
she may have paid out the actual gold, but did her stock 
of gold, in the long run, become smaller thereby? Did 
not she manage to recover, from other nations, the gold 



Various Factors Affecting Prosperity. 135 

so paid out? And could she recover this gold without 
giving goods or services in exchange for it? As a matter 
of fact, France paid for those foreign securities, not in 
cash, but in the shape of export goods or services. True, 
it also took a corresponding degree of saving activity on 
the part of the French people in order to accumulate the 
funds invested in those foreign credits, but these credits 
eould never have been built up, and the saving activity 
would have been of no avail to that end, without the 
concurrence of the highly favorable trade balance. Sup- 
pose the latter were wanting, and French capitalists 
would nevertheless undertake to buy a billion dollars' 
worth of foreign securities; then they would have to 
send that much cash abroad, and the drain of gold would 
at once derange their home markets in a manner to make 
a continuance of such buying impossible. 

The term "foreign trade" should be understood in its 
>road sense, covering not only the movement of goods, 
but all elements affecting a country's foreign account, 
such as ocean freight, expenditures of foreign tourists, 
interest accruing on foreign investments, etc. The two 
latter items form the chief source of France's favorable 
foreign balance- -which, as is well known, does not mani- 
fest itself in the shape of a large surplus of exports over 
imports, but which nevertheless enables the French to 
continually augment their holdings of foreign securities. 

While foreign trade represents the principal source 
of France's enviable financial condition, it also repre- 
sents the source of the wretched condition of Russia's 
finances. This country has become heavily indebted to 
the outside world, owing to the unfavorable state of her 
trade balances, and as a sequence to this indebtedness 
she is subjected to a constant drain upon her resources, 
which impoverishes her in the same proportion as it en- 
riches other countries. Indebtedness is no less objection- 



136 Various Factors Affecting Prosperity. 

able for a country than for an individual,* especially so 
where no values are created to offset the debt. Can Rus- 
sia's railroads, owned by the Government, be considered 
as partly offsetting her foreign debt, and to that extent 
justifying its creation? Hardly. Other European nations 
build their railroads out of their own resources, not with 
foreign funds. 

Not only will foreign trade prove instrumental in 
making some countries tributary to others, but it may 
also interfere more or less with a country's economic 
conditions so far as home trade is concerned. On page 
105 I have emphasized that those countries thrive best in 
which there obtains a proper mixture of saving propen- 
sity on the one hand and of spending propensity on the 
other: foreign trade, however, will to some extent dis- 
turb the working of this principle. 

Let ns conceive of an island commercially isolated, 
where the inhabitants are moderate savers but neverthe- 
less fond of good living. If of industrious habits they 
would be wealthy, even though their means of produc- 
tion may not rank with ours. Business would prosper 
and the demand would be brisk. Should now the island 
be opened to foreign trade, followed by the influx of 
cheap foreign manufactures, the brisk home demand 
would readily absorb the latter, and without a corre- 
sponding outgo of domestic goods the island would soon 
become indebted to the outside world — a result which, as 

* Some economists hold that where one country becomes indebted 
to another, this is practically a migration of capital, even where the 
debt originates l'rom the importation of consumptibles which repre- 
sent no capital and whose value is destroyed when they are con- 
sumed. For instance, a factory in the United States may be built 
with English capital, the latter coming over not in the shape of cash 
but of goods; such importation would relieve us from making the 
goods ourselves and would set our working forces free to work on 
the factory (?). 

Such a transaction might be taken for a migration of capital, on 
the ground that we built up home capital sufficient to offset the for- 
eign debt. In reality the transaction would merely prove that we 
were unable to hold our own in foreign trade and unable to pay for 
our imports with our exports. 



Parlous Factors Affecting Prosperity. 137 



stated, is as objectionable for a country as for an indi- 
vidual. Here we find that the inclination for good living, 
which among an industrious people ought to promote 
demand, and therewith production, becomes the means 
for impoverishing the community unless it is able to hold 
its own against the aggressions of foreign trade. As a 
consequence of such impoverishment the buying of for- 
eign goods would soon meet a natural check, and the de- 
mand for home production would be disturbed from the 
very beginning. 

A healthy condition of the foreign trade is therefore 
highly essential for ensuring prosperous conditions. Only 
where a country manages to hold its own in this respect, 
so as not to lose ground or become impoverished by for- 
eign trade — only there the proper mixture of saving and 
expending propensity will produce its beneficent results. 
And as a matter of fact we find that among the leading 
nations the evolution of foreign intercourse has taken 
such a turn that they are not (like Russia, Turkey and 
the South American States) left subject to a constant 
drain of their wealth, but on the contrary, they have 
shaped their foreign relations so that they derive a sur- 
plus income at the expense of other countries, which. 
makes them all the wealthier. 

Not only the economic conditions of a country may 
be affected by foreign trade, but also its money supply, 
as has already been pointed out in the early part of this 
chapter. All of which goes to show that a healthy state 
of the foreign trade is by no means an insignificant ele- 
ment in supporting business activity. 



Outside of the four factors considered in the forego- 
ing pages — industry, enterprise, an adequate money sup- 
ply, a healthy state of the foreign + rade — several others 



138 Various Factors Affecting Prosperity. 

may be enumerated which likewise are important in se- 
curing a country's prosperity, such as: good laws; sta- 
bility in the government; a wise fiscal system; a bounti- 
ful supply of productive capital; promptness in the in- 
vestment of savings, etc., etc. But, strange to say, and 
here we arrive at the essential point of our discussion, 
all of these factors may co-exist in a country, and still 
prosperity may be lacking. England affords an example 
of this. We find all of the above factors well represented 
there, nevertheless periods of depression occur quite 
often — -which goes to show that the presence of all of 
these several factors and the freest scope for their co- 
operation does not of itself suffice to banish those dis- 
tressing spells of stagnant business. To accomplish this 
Ave have to keep that element out of our economic system 
which causes the discrepancy between supply and de- 
mand and which so far has escaped the attention of our 
economists — Impair Savings. 



CHAPTER VIII. 

RECENT UPS AND DOWNS OF PROS- 
PERITY IN THE UNITED STATES. 

IN the preceding chapter 1 have pointed out that the 
maintenance of prosperous conditions depends not 
only upon a healthy state of the saving activity but also 
upon the co-operation of various other factors — an ade- 
quate money supply; a favorable condition of foreign 
trade; industry; and enterprise. The latter two factors 
depend largely upon individual energy; and inasmuch as 
we generally find an abundance of this in our modern 
communities, we also find an abundance of industry and 
enterprise, the only limit being drawn by local condi- 
tions; so, if economic disturbances occur, the primary 
cause thereof should not be sought in a relaxation of 
those two factors. For instance, the panic of 1907 was 
not caused by any slowing down of industry or enter- 
prise. Quite different is the situation with regard to the 
other two elements, foreign trade and the money supply. 
These do not depend so much upon individual energj'-, as 
upon a multiplicity of circumstances quite complex in 
their nature and hard to control, and though the figures 
and totals representing them may not vary much from 
year to year, these variations may in course of time ef- 
fect considerable changes in a country's economic condi- 
tion. To show how these important factors, saving activ- 
ity, money supply, and foreign trade, will affect prosper- 
ity as changes in their status take place, a concrete ex- 
ample may be instructive, such as is supplied by the re- 
cent economic history of the United States. Let us re- 
view this, commencing as far back as 1893. 



140 Recent Ups and Downs of 

CAUSES OF THE PANIC OF 1893. 

Previous to the panic year of 1893 two elements of 
disturbance had been at work for quite some time: first, 
our foreign trade (comprising the movement of merchan- 
dise and securities, ocean freights, interest, tourists' ex- 
penditures, etc.) had resulted in a growing indebtedness 
to Europe; second, the money supply had been artificially 
inflated by the annual injection of large amounts of sil- 
ver currency. Now it is not true, though it has often 
been asserted, that business men and capitalists took 
fright at the silver inflation and on that account became 
chary of engaging in new enterprises, and that this 
fright caused the panic ; for as a matter of fact the busi- 
ness world paid no attention whatever to the changing 
character of our currency previous to the catastrophe of 
1893. Nevertheless, the inflation had something to do 
with the panic. It worked harm in an unsuspected man- 
ner. As explained on page 129, a gradually increasing 
supply of currency will not result in an accumulation of 
idle cash funds in the money market, but will usually 
find absorption in the channels of production and trade 
— prices and wages rising accordingly. Such rise of 
prices reacts upon foreign trade, making the home mar- 
ket a good one for foreigners to sell in but a poor one to 
buy in; and here we arrive at the cause of the unfavor- 
able development of our foreign trade* and of the conse- 

* It may seem that a rise of prices, if it took place, should have 
manifested itself by a rise of the "index figures" and that an un- 
favorable balance should have manifested itself by an excess of im- 
ports over exports; while statistics showed neither. Let us examine 
the reasons why the statistics did not reveal the facts. 

The rise of prices, due to that inflation of the currency, was 
comparative rather than absolute. Prices in other countries were 
steadily declining (in compliance with the universal retrograde move- 
ment of prices which took place between 1873 and 1S97). but with us 
the decline was largely checked bv the inflation of the currency. 
Without this inflation all prices and wages would have been forced 
to a lower basis, the same as in Europe, and we then would have 
been in a better position to hold our own in foreign trade. But as it 
was, we had comparatively higher prices, due to the inflation, with- 
out higher index figures. 

As to the statistics of foreign trade, they showed quite an ex- 



Prosperity in the United States. 141 

quent growth of our foreign indebtedness which took 
place at that time. 

This growth could not go on forever. For many- 
years Europeans had been content to take American 
bonds and stocks and other titles to property, in pay- 
ment for the annual dues accruing in their favor, but 
finally they showed a decided preference for cash, and 
the drain of funds which followed reduced our money 
markets to that precarious condition where diny un- 
toward occurrence may cause a collapse. 

LEADING FEATURES OF THE PANIC OF 1893 AND 
OF THE SUBSEQUENT DEPRESSION. 

An untoward event, of the nature just referred to, 
took place in the spring of 1893 when a gang of specu- 
lators made an onslaught on the stock market. Taking 
advantage of the weak situation, they had been making 
"short sales" of stocks to a large extent, and now raided 
the market, managing to depress prices by all sorts of 
devices in order to cover their "short sales" at low fig- 
ures and thus reap large profits. One of the devices con- 
sisted in creating an artificial shortage of money, which 
^rgely helped to depress prices and to shake confidence. 
Thejr even went so far as to negotiate large loans with 
the commercial banks, paying interest on these loans but 
leaving the funds unused, thus tying them up and keep- 
ing them out of the reach of others. In consequence the 
tightness of money became quite severe, spreading from 
the Stock Exchange to other lines of business, and from 
New York to all parts of the country, everywhere de- 
cess of exports over imports, for the years preceding the panic year, 
and might therefore be construed as favorable. For the four years 
1889 to 1893 the export surplus averaged $73,000,000 per annum. When 
considering, however, that our annual dues to Europe for interest, 
ocean freights, tourists' expenditures, came to not less than double 
that amount (according to the compilations of the New York Journal 
of Commerce) and possibly to more, it becomes clear that the seem- 
ingly favorable statistics of foreign trade did not reveal the true 
situation. 



142 Recent Ups and Downs of 

pressing market values and prices, engendering distrust 
as to what might follow, and causing a mad rush to real- 
ize on property before things would get worse. 

The panic continued for several months before the 
general anxiety was allayed. After that the funds which 
had disappeared, owing to the prevailing distrust, came 
forth from their hiding-places, flowing into the commer- 
cial banks and causing a glut in the money market. Con- 
fidence evidently returned, but not prosperity. Large 
amounts of idle cash funds were on hand, ready for any 
profitable investment that might offer, but such oppor- 
tunities had become exceedingly scarce. Enterprise 
seemed to be stifled Ordinarily the field for enterprise 
and for investments must be found in the creation of 
new productive capital ; like factories, etc. : but an ex- 
tension of these pre-supposes an increased demand for 
their products, and this demand was lacking. 

Why was it lacking? "What caused the great falling 
off of the demand which took place at that time? It was 
brought about by that mysterious factor which so often 
has proved the scourge of mankind — the saving activity 
in its Impairing Form. 

Previous to the panic the saving activity was of a 
different character, manifesting itself principally in the 
beneficent Captalistic Form, in the creation of new con- 
structions and of additional wealth. This, its proper and 
desirable sphere of action, was closed to it by the panic, 
and at once it was changed from a source of good to a 
source of evil. Not finding investment any longer in new 
constructions (except to a limited extent), the savings 
funds found it in that peculiar manner where the act of 
investing does not bring with it a demand for working 
forces, and where the services of the latter are left un- 
called for. If at that period all saving activity had 
ceased, and if the wealthy, instead of continuing to ac- 



Prosperity in the United States. 143 

cumulate part of their income, had made larger expendi- 
tures for luxuries, a corresponding demand for working 
forces would have ensued and the depression would have 
ceased at once. The wealthy, however, did not pursue 
such a course ; the saving activity went on — therefore 
the depression. 

True, a cessation of the saving activity, though it 
would ha^e done incalculable good, would not have re- 
lieved the trouble entirely, for the large foreign indebt- 
edness still existed and Europe continued its demands 
for payment in cash, therewith causing a steady drain of 
our gold supply. This drain became so severe that at 
times it was doubtful as to whether the country's cur- 
rency could be kept on a gold basis, the reduction to a 
silver basis seeming imminent. Only the strenuous ef- 
forts of the Government, aided by the support of a syn- 
dicate of bankers, saved the country from an exhaustion 
of its gold supply and from jeopardizing its gold 
standard. 

The situation became still more complicated by the 
passage of a measure which, though commendable in it- 
self, was of doubtful value under the circumstances, 
namely, the enactment of a law for reducing the tariff. 
The lowering of the duties certainly tended to facilitate 
imports without correspondingly stimulating exports — at 
least not for the time being — and the result of this tend- 
ency was fully disclosed by the statistics, inasmuch as 
the excess of exports over imports fell off at once, being 
nnly 75 million dollars in the first year under the new 
tariff, as against 237 millions in the preceding year. With 
all due respect for the principle of free trade, it should 
be admitted that the time chosen for enacting the new 
tariff was inopportune, rendering the country's trade 
balance so much the worse and correspondingly increas- 
ing the drain on our gold supply. 



144 Recent Ups and Downs of 

The foregoing will serve to show the far-reaching in- 
fluence which foreign trade, and the status of the trade 
balance resulting therefrom, may exert on the monetary 
and economic conditions of a country. Ordinarily we 
find no monetary strain in a country where a depression 
prevails, that is, after the panic has subsided. Nor was 
such a strain experienced by us; nevertheless a constant 
anxiety existed about the money situation and about the 
question whether the Government would be able to main- 
tain gold payments. This anxiety undoubtedly helped to 
intensify the general feeling of despondency and to ac- 
centuate the depression. The silver inflation alone would 
not have been sufficient to cause that drain of gold and 
that distrust in the stability of our monetary standard 
unless the adverse trade balance had co-operated with it. 
The silver of itself will not expel the gold. It does not 
do so in France, despite the great volume of silver circu- 
lating there. France's trade balance is favorable, so she 
practically has not to make any cash payments abroad, 
and there is no drain on her money supply. But with us 
the situation was different. We had to make large pay- 
ments abi'oad in addition to what we paid in the shape 
of merchandise, and only gold was accepted in settle- 
ment, so our gold went out while the silver remained. It 
seemed as if the gold was expelled by the silver cur- 
rency: in reality it was expelled by the adverse trade 
balance. 

Tt should be understood that the depression which 
follows a panic is not necessarily coupled with an ad- 
verse trade balance and with currency troubles. It is not 
so in England. There an adverse trade balance (i. e., an 
unfavorable balance of the foreign account) is practi- 
cally unknown ; nor is the currency a subject of concern 
except at times of acute panic ; still, periods of depres- 



Prosperity in the United States. 145 

sion have been quite frequent there. The example af- 
forded by tho United States in those memorable years 
from 1893 to 1897 has been chosen by me for the special 
purpose of illustrating a combination of those three im- 
portant factors of disturbance: an adverse trade balance, 
an unfavorable monetary situation resulting therefrom, 
and last but not least, Impair Savings, the latter invari- 
ably constituting the governing element of all depres- 
sions. 

THE RETURN OF PROSPERITY. 

While it was the drift of our foreign trade which pro- 
duced the various factors of disturbance witnessed dur- 
ing the depression of 1893 to 1897, it was a change in 
that drift which put an end to our troubles and opened 
the gates for the return of prosperity. This change was 
effected bv two memorable events: the enactment of a 
new tariff law, and in the same year, 1897, an unusually 
bountiful harvest, coupled with poor crops in Europe, 
which enabled us to dispose of our large surplus at high 
prices. In consequence the excess of exports over im- 
ports rose to the phenomenal figure of $615,000,000 in 
the year 1897-98, part of which was paid for in cash; so 
the afflux of gold witnessed in the preceding years was 
changed into an influx, and the drain on our money sup- 
ply came to an end. Owing to the new tariff, the imports 
of merchandise fell off as much as $150,000,000 in the 
year 1897-98, compared with the previous year, a fact 
which certainly tended to stimulate domestic production. 
The greater activity caused thereby as well as by the 
largely increased exports, resulted in swelling the peo- 
ple's income, this again added to their purchasing power 
and" to the general demand, this again fostered produc- 
tion still more and therewith created an enlarged de- 
mand for the means of production, thus awakening a 
spirit of enterprise. Then the "Multiplying Principle" 



146 Recent Ups and Downs of 

stepoed in — enterprise and new constructions calling for 
additional working forces 6 , and these in turn, when ex- 
pending their income, giving rise to a more extended de- 
mand for commodities; in other words, the well-known 
principle of action and reaction was brought into play, 
which did the rest in boosting up business activity to the 
high-water mark. With the revival of enterprise that 
malignant factor, "Impair Savings," which for four 
years had clogged the wheels of prosperity, disappeared, 
the character of the saving process being transformed 
from the harmful to the beneficent type, from the Im- 
pairing to the Capitalistic Form. 

The remarkably favorable trade balance recorded in 
the year 1897-98 fell off somewhat in the subsequent 
years, but nevertheless continued at a very high average; 
this for two reasons: first, the hard times from 1893 to 
]897 had resulted in depressing all wages and prices ow- 
ing to severe competition among working men and busi- 
ness men, thus enabling ns to produce our wares at lower 
cost, so as to compete with Europe in many lines of man- 
ufacture ; second, the protection afforded by the high 
tariff of 1897 which so largely excluded foreign goods 
from our markets stimulated home production and, 
strange to say, Europe acquiesced in this policy of ex- 
clusion and refrained from adopting retaliatory meas- 
ures. 

It has often been stated that if we want to sell to 
other nations we must buy from them, the one depending 
upon the other. There seem to be some flaws in that 
theory, however, for our own experience during that 
period demonstrates that we could manage to increase 
our sales at the same time that we reduced our pur- 
chases. True, this one-sided policy may not work in the 
long run, but it answered very well for the time being. 
It did not result in a shrinkage of exports; on the other 



Prosperity in the United States. 147 

hand, it broadened the home market for the sale of our 
own products, which, in addition to the energetic exploi- 
tation of our immense natural resources, afforded em- 
ployment for our working forces to an extent never 
known before. Where all working forces find employ- 
ment and Avhere they are aided by the best possible 
means of production, prosperit} r evidently must be at its 
maximum. 

COMPLICATIONS DUE TO FOREIGN TRADE. 

In course of time, however, the one-sided policy re- 
ferred to led to consequences which were not foreseen 
when enacting the high tariff of 1S97. The latter harbors 
an element of mischief which has made itself felt more 
and more in recent year?. It helps to raise all prices and 
wages, because it excludes tbe leveling influence of for- 
eign competition. The rise of prices means a weakening 
of our position in international trade, rendering our 
market a better one for foreigners to sell in and a poorer 
one to buy in. 

True, this tendency has not so far manifested itself in 
the shape of reducing our exports, which indeed are con- 
stantly growing ; but the imports have been growing 
much faster (up to the fall of 3907), and in consequence 
we see a gradual shrinkage in the excess of exports over 
imports, and a waning of our favorable trade balance. 

This shrinkage of the trade balance would do no 
harm and might be regarded by us with complacency 
were we situated as favorably in this regard as England, 
Germany or France*, or if only we could come out even 
in our international trade, without augmenting our for- 
eign indebtedness. But the fact is we have already 



* In those countries the trade balance is apparently on the wrong 1 
side, showing an excess of imports, which, however, they can very 
well afford to pay for out of the income derived from their foreign 
investments. 



148 Recent Ups and Downs of 

reached a stage where, despite the large balance of trade 
still running in our favor, the balance of payments twns 
out against us — a fact clearly evidenced by our appear- 
ance as persistent borrowers in the London money 
market. 

•What becomes of the large excess of our exports? 
Though not so large as in the years 1897 to 1901, it has 
still been averaging over 400 millions annually in recent 
years. Only a part of this amount is absorbed by inter- 
est on our foreign indebtedness, by ocean freights, ex- 
penditures of American tourists, etc. The remainder is 
probably absorbed by smuggling (especially of precious 
stones), undervaluations at the custom houses, and pos- 
sibly by errors in gathering the statistics. Be this as it 
may, the fact remains that whenever our excess of ex- 
ports frills much below 450 millions per annum, our bor- 
rowings in London (in the shape of finance bills and of 
eontangoes on American securities) seem to increase. 

Such being the present situation, and the probability 
looming up before us that our trade balances will dimin- 
ish more rapidly hereafter, we may well ask the ques- 
tion, Where are we drifting?* 

We might keep on borrowing from Europe, and 
might continue to place large bonded loans abroad (such 
as were recently negotiated in the French market by 
some of our prominent railroads, and even by the City 
of New York) and in this way meet the annual deficit 
growing out of our foreign trade. Such a policy, how- 
ever, would only serve to bridge us over the present, and 
would render the final adjustment all the more distress- 



* After the panic of 1907 set in, a remarkable change in the 
trade balance took place, exports increasing and imports diminishing 
— a change which averts any troubles from that source for the time 
being, and therefore is proving a considerable help towards the 
process of recuperation. It remains to be seen whether this favor- 
able trade balance will last— at least to an extent that will prevent 
a recurrence of such an unfortunate state of our foreign account as 
we experienced in the period from 1S93 to 1897. 



Prosperity in the United States. 149 

ing, this aside from the fact that our position would be- 
come more precarious as we go along, since Europe 
might at any time cease to take our securities — an event- 
uality which is bound to happen sooner or later. Already 
the London bankers have at times been discriminating 
against our securities, charging as much as 8 and 9 per 
cent, on American contangoes. 

It may be that history will repeat itself. The troubles 
we experienced in those hard years 1893 to 1897 resulted 
largely from our adverse trade balance and our growing 
foreign indebtedness. Precisely the same conditions seem 
to be developing at present, and they may lead to the 
same end — unless the drift of events takes a turn which 
changes the position. 

Thus we find that though our high protective tariff of 
1897 effected an almost magical transformation from de- 
pression to prosperity, its after effects will breed trouble. 
It restricted imports for a time; on the other hand it 
helped to raise all wages and prices, thus gradually fa- 
cilitating European competition in our markets despite 
the barrier erected by the high tariff. Had the moderate 
duties of 1894 remained in force, the change in our for- 
tunes would have been less spectacular, but of a healthier 
character. Our surplus trade balance, though reduced to 
75 millions in the first year under the low tariff of 1894, 
rose to 102 millions in the second and to 286 millions in 
The third, and most likely it would have kept on growing 
had the tariff been left undisturbed, perhaps to figures 
as large as those reached under the high tariff of 1897. 
At the same time the leveling influence of foreign com- 
petition would have prevented domestic prices and wages 
from rising to such figures as they did. 

The sentiment in favor of lowering the tariff has of 
late become more pronounced. Possibly, however, a de- 



150 Recent Ups and Downs of 

cided move in this direction may prove as inopportune 
as it was in 1894; it would, for a time at least, still fur- 
ther reduce our already diminishing trade balance. 

THE RELATIVE SCARCITY OF CURRENCY. 

In the foregoing pages I have dwelt at some length 
on the subject of foreign trade, and have pointed out 
that the harm arising from our unfavorable trade bal- 
ance (or, more properly speaking, our unfavorable bal- 
ance of payments) consists not so much of the annual 
tribute we have to pay to Europe in the shape of an ex- 
cess of exports over imports — for which excess we get no 
returns — as of the possible reaction upon our monetary 
position. It should be well understood, however, that 
the latter does not depend entirely, nor even chiefly, 
upon the state of our foreign trade, but is influenced to a 
much greater extent by domestic factors — labor unions, 
trade combinations, and last but not least by the annual 
additions to the volume of "bank money 5 ". 

As to labor unions and trusts, I have mentioned on 
page 129 that they are ever trying to advance wages on 
the one hand and prices on the other, without in the 
least considering whether the country's money supply is 
adequate to stand the added strain imposed upon it by 
snch advances. Obviously, the higher the average of 
wages and prices, the greater ought to be the money sup- 
ply needed to transact the country's business. In a way, 
therefore, the efforts of those combinations resulted in a 
reduction of our country's money supply — not in its vol- 
ume but in its buying power. In this sense .the effect 
upon the money volume was almost the same as if part 
of it had been blotted out of existence. 

To a large extent the lessened purchasing power of 
the currency in circulation was compensated for by addi- 
tions to its volume. But these additions fell short of the 



Prosperity in the United States. 151 

increasing requirements of the country. The total circu- 
lation (outside the Treasury) rose from 1,640 millions in 
1897 to 2,772 millions in 1907. an increase of about 1,100 
millions. This additional supply of 1,100 millions had to 
meet a number of new demands upon the currency, 
caused by various factors, four of them paramount in 
importance : first, the growth of population ; second, the 
extraordinary business activity; third, the rise of all 
wages and prices, calling for more currency in each in- 
dividual transaction; fourth, the enlarged cash needs of 
the banks for reserve purposes. The absorption of money 
for the latter purpose has not received much attention 
on the part of economists, but its importance will be 
readily understood when we consider that out of the 
total circulation of about 2,700 millions (in July, 1907) 
there was over a billion locked up by the banks, leaving 
only 1,700 millions in actual hand-to-hand circulation. 
Of the 1,100 mdlions added to the currency between 1897 
and 1907, over one-half was absorbed by the banks for 
reserve purposes, during the same period, leaving only 
the smaller portion to meet the other three demands 
mentioned above, those consequent upon the increase of 
population, of business activity, and of wages and prices. 
This proved insufficient for the requirements. 

Nevertheless, we experienced no actual dearth of cur- 
rency, at least not in the channels of production and 
trade ; this on account of the great expansion in the vol- 
ume of "bank money 5 ", which to a certain extent took 
the place of currency, and is, in fact, coming more and 
more into use for some classes of payments where for- 
merly currency was employed. This substitution, how- 
ever, progresses but slowly, and on the whole the fact 
remains that for the payment of wages and for the pur- 
poses of the retail trade, currency is the thing needed. 

Another reason which prevented an actual dearth of 



152 Recent Ups and Downs of 

currency in the channels of production and trade must 
be found in the fact that the bank money 5 , of which an 
ample supply existed in the hands of business men, could 
readily be changed into cash, the banks being under 
compulsion to make such exchange whenever demanded, 
even where they encountered difficulty in procuring the 
necessary cash and often had to encroach upon their 
legal reserves in doing so. Business men, therefore, met 
no difficulty in procuring the currency they needed, so 
long as they commanded a supply of "money in bank." 
But a peculiar situation developed in consequence — on 
the one hand, monetary ease prevailing in the channels 
of production and trade, and on the other a constant 
dearth of funds on the part of the banks, who found it 
difficult to keep their legal reserves intact whenever their 
depositors, who needed the money for purposes of their 
current business, had to withdraw more of it than the 
banks could well afford to spare. In addition to frequent 
embarrassments from this source, they were exposed to 
a continuous pressure on the part of borrowers clamoring 
for loan accommodations far in excess of what the banks 
could grant — not so much for purposes of production 
and trade (demands which the banks generally consid- 
ered as having precedence over others) as for purposes 
of permanent investment, in the shape of loans on bonds, 
stocks, mortgages, etc. 

Owing to this double strain, the free funds of the 
commercial banks ran down in an alarming degree. The 
banks naturally extracted from the general circulation as 
much money as they were able to retain, so there was no 
more in circulation than actually needed. And whatever 
cash they could manage to retain was used by them, al- 
most to the last dollar, for reserve purposes, as a basis 
for building up additional credits. The extent to which 
+ his was carried on may be inferred from certain figures 



Prosperity in the United States. 153 

given in Government reports, according to which the re- 
serves held by the National Banks underwent the follow- 
ing change : in 1899 they formed about 30 per cent, of 
the total of the "deposits", in 1906, only 20 per cent. 
This does not mean that the funds of the banks dimin- 
ished in their sum total, which on the contrary rose con- 
siderably; but the structure of credits (and therewith of 
"deposits") soared to such a gigantic height that the 
banks' cash fuuds, despite their much larger aggregate, 
showed a smaller ratio when compared with the deposits. 

The commercial banks managed to build up that 
structure of credit higher from year to year, notwith- 
standing the difficulty they met in gathering cash funds 
for reserve purposes, where the depositors withdrew the 
money about as fast as the banks tried to accumulate it. 
On the whole, however, the banks found themselves much 
hampered by this scarcity of cash (which, I repeat, was 
experienced by them only, not by the business man), 
otherwise the piling up of credits would have gone on 
still faster than it did. In this connection I may mention 
the fact that the New York banks, which are bound to 
keep a cash reserve of 25 per cent., have been unable, 
from 1904 to 1907, to increase their loans and therewith 
their deposits, despite the great demand for loan accom- 
modation ; such increase of loans as did take place in the 
United States being confined chiefly to country banks, 
where the reserve of actual cash, as fixed by law, need 
not exceed 6 per cent. 

Owing to the great demand for cash capital and loans 
on the one hand and the dwindling of free loanable cash 
funds on the other, the condition of the money market 
grew more and more precarious. While the money sup- 
ply certainly was ample to meet all reasonable demands, 
a growing disproportion developed between the two 
classes of the money supply, currency, and "bank 



154 Recent Ups and Downs of 

money 5 ". The volume of the latter had been swelling 
prodigiously, from 3,109 millions in 1897 to 9,602 mil- 
lions in 1907. To maintain a proper proportion the cur- 
rency should have been expanding in the same ratio, 
which, however, it did not do, and such increase of it as 
did take place was largely absorbed by the banks for re- 
serve purposes, as explained further above. On account 
of this growing disproportion the bank money finally 
was unable to keep up its par value with the currency, a 
development which at once engendered general distrust 
and led to the crash. 

UNHEALTHY BASIS OF THE BANK MONEY. 

The prodigious growth of bank money 5 which took 
place during the period mentioned, forms a striking 
characteristic of the recent developments in the United 
States. That growth was due, as already stated, to the 
fact that the commercial banks (the creators of the bank 
money) did not confine their loans to the legitimate 
sphere, the discounting of commercial paper, but largely 
branched out into the field of permanent investment — 
making loans on bonds, stocks, mortgages, etc.* Of the 
total bank money (about nine billions in 1907) only the 
smaller part originates from loans made on commercial 
paper, the larger part having been issued on the basis 
of the above-mentioned securities. Nominally, it is true, 
the latter class of loans are not of a permanent nature, 
being generally put out "'on call," or on short time, 
which gives them the appearance of being of a tempo- 
rary character, especially so as the funds thus loaned out 



* Such loans, as a rule, are not issued direct to the railroads or 
the industries needing the funds, yet they are indirectly. Suppose a 
railroad makes a bond issue with the help of a banker, the latter 
inviting the investing public to subscribe to the bonds; then the 
public as well as the banker will largely depend upon the banks to 
make advances on the bonds so issued. Thus the funds advanced by 
the banks really come to be used for permanent investment in the 
railroad. 



Prosperity in the United States. 155 

by the banks constantly revert to them. In reality, 
however, the loans constitute permanent investments, 
for their aggregate does not diminish, expanding rather 
than contracting, and the maturing loans being paid off 
by making new ones, shifting them from one bank to the 
other and from one holder of the securities to the other. 
The money needed to pay them off for good (over five 
billions of investment loans and over nine billions of all 
classes) is not in existence — see footnote on page 17. 

A peculiar characteristic of the bank loans, and one 
but little understood by economists, consists of the fact 
that they become money (bank money) after serving 
their primary purpose of furnishing cash capital to the 
borrower. The latter generally does not withdraw the 
amount of the credit in the shape of currency, but merely 
transfers the title to it to other persons, and each of 
these, in fact every man in the community, will treat 
such transfers of bank credit the same as payments in 
money. Thus the mere title, i. e., the mere right to draw 
money against the credit, becomes money, owing to the 
tacit understanding among business men to consider 
these rights as money. And the multiplication of these 
rights has, to precisely the same extent, augmented our 
money supply. The larger the aggregate of the loans of 
the commercial banks outstanding at any one time, the 
larger the aggregate of these rights, i. e. of bank money, 
and the larger the country's money volume. 

I mention (though it is well understood) that a man 
who procures a loan from a bank generally borrows the 
funds to pay them out to others, while those others, who 
thus become the owners of the borrowed bank money, 
are not the borrowers. 

It may seem unusual to count these bank credits as 
a part of the country's money supply. A business man, 
however, will count his "bank money" as cash on hand, 



156 Recent Ups and Downs of 

just the same as the currency in his safe or in hif. till. 
This is true of the deposits in National banks, State 
banks and Trust banks, but does not apply to those in 
Savings banks (see footnote, page 20). 

I repeat, two classes of loans have contributed to 
build up the enormous extension of bank money from 
3 ; 100 millions in 1897 to 9,600 millions in 1907; first, the 
loans issued by the commercial banks on the strength of 
commercial paper, backed by merchandise and to be re- 
deemed out of the proceeds of the sale of the merchan- 
dise: second, loans issued on bonds, stocks, etc., the pro- 
ceeds of which loans generally found their way into in- 
vestments of a permanent character, i. e. in new con- 
structions. These loans cannot be cancelled or reduced 
in their aggregate except by the tedious saving process. 
Without this latter class of loans that prodigious volume 
of bank money would not be half of what it is and would 
not have constituted that element of danger which finally 
led to the collapse. 

EXCESSIVE VOLUME OF BANK MONEY, YET A 
DEARTH OF CASH CAPITAL. 

It may seem contradictory that at a time where the 
volume of bank money 5 had attained such a gigantic 
size, representing so much "liquid capital" in the hands 
of business men, there should have been that extreme 
dearth of cash capital which was really witnessed. This 
seeming contradiction is partly explained by another pe- 
culiar characteristic of bank loans (likewise overlooked 
by most of our economists), namely, that they can be 
used for investment purposes only once. If their aggre- 
gate increases by one billion dollars, this amount of new 
credit money will supply the funds for building up new 
constructions of an equal value, but no more. Having 
once been used for that purpose, the bank loans become 



Prosperity in the United States. 157 

"Business Money." Though originally entering the 
money market in the shape of cash capital, available for 
investment, they cease to be such as soon as they are in- 
vested. To make this clear let us suppose that a rail- 
road needs funds in order to make some improvements, 
and issues bonds which its banker pledges with some 
commercial bank, the latter advancing the funds in the 
shape of bank credits. Let us further suppose that out 
of this credit (bank money) a sum of $1,000 be trans- 
ferred to a builder. Does this amount represent loanable 
or investable cash capital in the hands of the builder? 
Certainly not. He needs that money to make payments 
for material and labor, only a fraction remaining for his 
profit. The $1,000 has become Business Money by being 
transferred to the builder, and when he transfers it to 
others it remains Business Money, the same as practi- 
cally all bank loans. Every new owner needs it for use 
in his current business, and can not apply it to purposes 
of permanent investment except to the extent that he 
makes savings out of his income. Then, however, the 
funds employed in such investment would no longer be 
derived from bank credits, but from savings — evidenc- 
ing the fact that bank credits, when once invested, can 
not be used again for investment purposes, and explain- 
ing why, in spite of that immense volume of nine billion 
dollars of bank money, all of which counts as cash, and 
originally appeared as cash capital in the money mar- 
ket, the latter was left bare. 

In this connection I remind the reader of the sharp 
distinction we have to make between cash capital avail- 
able for investment (funds which actually constitute 
the money market), and the cash funds which constitute 
the business men's working capital. These have already 
found investment, and though they may seemingly be 
idle for a time, they are needed by the owner for the pur- 



158 Recent Ups and Downs of 

pose of carrying- on his regular business, so he neither 
could afford to loan them out nor to invest them in some 
enterprise. Practically all of the nine billions of bank 
money falls within this second classification, very little 
of it representing cash capital available for investment. 

CAUSES OF THE DEARTH OF CASH CAPITAL. 

The abnormal scarcity of cash capital available for 
the demands of the money market, going hand in hand 
with the tremendous growth of cash funds in the shape 
of bank money — seemingly a paradoxical combination — 
presents one of the most conspicuous features of the 
recent economic history of the United States. What was 
the reason of the constant tightness of the money market 
and of that extreme dearth of cash capital in the years 
preceding the panic of 1907? "We can conceive of two 
causes; either the demand for cash capital was excessive, 
or the annual supply of new cash capital was too small. 
Some economists prefer the latter explanation. They 
speak of extravagance on the part of the people, of too 
much luxury and good living, and of the consequent lack 
of saving power; too much of the people's income being 
spent, too little saved. As a matter of fact, however, 
there was never more saving and accumulating going on 
than in the years preceding the collapse. 

Let us take a glance at the Chart. It represents the 
money market in the shape of the Black Central Field, 
and it shows the two sources whence the funds come to 
build up the money market: first, the red lines 10 and 11, 
standing for savings or surplus earnings, of a net aggre- 
gate of perhaps 3 or 4 billions per annum (see page 115) ; 
second, the red-and-black line 18, standing for the aug- 
mentation of bank money, which for the five years 1902 
to 1907 averaged about 600 millions per annum. Never 
before, in the history of this or any other country, has 



Prosperity in the United States. 159 

the annual' supply of cash capital attained such propor- 
tions — and the fact that cash capital of such magnitude 
actually did accrue, is evidenced by the visible conse- 
quences — by the concurrent increase of the country's 
tangible wealth to a like extent, shown by recent statis- 
tics. So the assumption referred to above, that the an- 
nual supply of new cash capital was too scant, proves 
incorrect. In fact it was quite large. But the demands 
for new capital were still larger. All of the funds de- 
rived from those two sources were readily absorbed for 
investment purposes, such as are represented in the Chart 
by lines 12, 14, 15A, 15B, 15C, and 16; i. e., in such ways 
as lead to the creation of new property and to the exten- 
sion of the country's wealth. 

If we find that the dearth in the money market pre- 
vailing in the years 1905, 1906 and 1907 must be Ascribed, 
not to the scantiness of the stream of new cash capital 
flowing in every year, but to the abnormally great de- 
mand for cash capital, which far exceeded the supply, 
the question arises, What caused this abnormal demand? 

It was intimately connected with the country's great 
prosperity. 

And this prosperity hinged largely upon the abun- 
dance of opportunities* for enterprise and new construc- 
tions. The latter gave employment to working forces 
outside of those regularly engaged in production and 
trade ; not only employment, but also income. This in- 
come meant increased purchasing power; this, increased 
demand for commodities; this, increased production of 
commodities; this, increased demand for the means of 
production, factories, railroads, etc., and this, again, ex- 

* On page 161 it will be shown that the great prosperity resulted 
not only from the existence of abundant opportunities for enterprise, 
but also from an inflation of the bank money. The latter, however, 
could hardly have grown to the excessive extent stated on page 154 
without the co-operation of the factor above-mentioned — the ample 
opportunities for investment. 



160 Recent Ups and Downs of 

tended still more the opportunities for profitable enter- 
prise. This well-known inter-play of action and reaction 
was further stimulated by the rapid growth of popula- 
tion, which of itself extended the demand for commod- 
ities, therewith again enlarging the demand for the means 
of production, i. e., for new constructions. And all these 
new constructions, inasmuch as they called for more cash 
capital per annum than was accruing from the two 
sources mentioned — savings on the one hand and in- 
crease of credit money on the other — did their part in 
promoting that insatiable demand for more and more 
cash funds, stimulating the issue of bank loans, and 
therewith the excessive creation of bank money. 

INFLATION AND DEPRECIATION. 

In course of time the rapid inflation of the money 
volume — partly in the shape of coin and bank notes, but 
overwhelmingly in the shape of bank money 5 — developed 
mischief of a peculiar kind. It not only made possible 
the constant rise of wages and prices contended for by the 
labor unions and trusts, but harbored a distinct tendency 
of its own in the same direction, thus still further increas- 
ing wages and prices. 

To explain the nature of this peculiar tendency let us 
assume, for the sake of illustration, that all working 
forces 6 in the United States earn 20 billion dollars per 
annum. When they expend this income, mostly for con- 
sumptibles and partly for the creation of permanent cap- 
ital, they will bring a demand for working forces into 
the market which likewise amounts to 20 billions. Let 
us assume furthermore that this demand suffices to em- 
ploy all available working forces of the country; also 
that the existing money supply is just sufficient to 
transact the country's business. Now suppose that the 
money volume were augmented by one billion dollars 



Prosperity in the United States. 161 

in the course of a year, in the shape of bank-money; 
what will be the consequence? This additional money, 
which enters the market as cash capital, can be used for 
new constructions and for commercial enterprise just 
the same as cash capital accruing from the saving pro 
cess, see page 23, and the business men borrowing such 
cash fnnds from the banks will surely so use them— 
otherwise there would be no object in borrowing. If so 
applied, the money will be turned into income for work- 
ing men and business men and will create a demand for 
working forces to the extent of one billion dollars, this 
in addition to the normal demand. The latter, accord- 
ing to our assumption, amounts to 20 billions, and ab- 
sorbs all working forces of the country. Where the nor- 
mal demand fully employs these, can the additional de- 
mand, due to the expenditure of the additional billion 
dollars, employ more of them — i. e., more working forces 
than there are? If not, will not the demand due to that 
additional expenditure simply result in raising wages 
and prices, M r ithout increasing the output? 

The answer to this question may readily be found in 
the great delay in having orders tilled and in the scarcity 
of labor which prevailed in the years preceding the col- 
lapse. Such scarcity, of itself, inevitably tends to raise 
wages, and therewith prices — which means a depreciation 
of the money supply. In other words, the great increase 
in our money volume was largely swallowed by deprecia- 
tion; bearing out the statement made on page 129, that 
where the money volume expands, the country's mone- 
tary requirements will gradually adjust themselves to 
the larger volume. 

INFLATION THE MOVING FACTOR. 

In the foregoing sub-chapters several factors have 
been considered which played their part in shaping the 



162 Recent Ups and Downs of 

peculiar economic development in the United States from 
1897 to 1907 — the great prosperity — the unusual demand 
j'or commodities as evidenced by the delay in having 
orders filled and by the scarcity of labor — the dearth of 
cash capital — the aggressions of labor unions and trusts 
—the growing depreciation of the money's purchasing 
power, resulting from the steady increase of wages and 
prices. The moving factor for all of these phenomena 
must be found in the unprecedented inflation of the bank 
money 5 . This factor should be held responsible for the 
excessive, over-strained business activity of that period, 
as well as for the subsequent collapse. Inflation was the 
cause of both. 

Most of our economists are not inclined to admit the 
inflationary character of the expansion of the bank 
money and prefer to believe the great swelling of its 
volume to be harmless, on the plea of its being self- 
adjusting — expanding and shrinking according to the de- 
mands of trade ; and the great expansion during the time 
of the boom simply being due to the great demand for 
purposes of trade. It escaped their attention that it was 
the inflation itself which created this demand. 

How this was done has been explained on page 161. 
And in the several preceding sub-chapters I have al- 
ready pointed out how most of the phenomena enum- 
erated above originated from the inflation. Can we like- 
wise attribute the dearth of cash capital to that cause? 
As it were, could the undue increase of the bank money 
cause a scarcity of the bank money? 

It certainly can, paradoxical as it may seem. True, 
at first the increase will tend to relieve the strain on the 
money market. The increase of the total of the bank 
money by one billion will satisfy the demand for cash 
funds to an equivalent extent. But what will subse- 
quently become of that billion of additional bank money? 



Prosperity in the United Stales. 163 

Does it assume the shape of idle cash funds, to be a drug 
on the money market ? No ! It is needed by the bor- 
rower to make payments and is rapidly absorbed in new 
constructions. If so, it will increase the demand for 
working forces above the normal (see page 161) ; there- 
with the income of these working forces; therewith the 
demand for commodities on the part of the latter. This 
will over-stimulate the general demand. Then the means 
of production (factories, railroads, etc.) will be found 
insufficient to meet the unusual demand. In consequence 
more factories, more railroad facilities, and more means 
of production will be needed, which, in turn, means an 
increased demand for cash funds and for bank money — 
i. e., a demand for still more inflation. Thus the one in- 
flation will engender another (at least in a rapidly de- 
veloping country) and, if so, will tend more to strain 
than to relieve the money market — until the inevitable 
collapse makes an end to further inflation, for the time 
being. 

I repeat, it may seem paradoxical that an artificial 
increase of the money volume should result in a scarcity 
of cash funds — but the same result has been observed at 
other periods of inflation. The creation pf artificial 
money will (except in rare cases) stimulate the demand 
for commodities above the normal. This demand may 
seem quite healthy; and the increased production result- 
ing therefrom may likewise seem quite healthy, inas- 
much as it "merely follows the actual demand." Never- 
theless it is the inflation which actuates this abnormal 
demand, and the latter will cease when inflation ceases 

THE PANIC OF 1907. 

As the primary cause of the collapse of 1907 we have 
to set down the overgrowth of the volume of bank 
money & ; as secondary causes the various factors result- 



164 Recent Ups and Downs of 

ing from this overgrowth. The steady depreciation of 
the money had to work mischief sooner or later; the 
abnormal demand for cash capital, coupled with the 
constant tightness of the money market, created of itself 
a position impossible to maintain in the long run ; and the 
growing volume of the bank money (see page 154), was 
bound finally to make itself felt in some way or other. 

It was especially the latter factor — the excessive vol- 
ume of bank money coupled with an inadequate volume 
of currency — and the growing disproportion between the 
two kinds of money, which precipitated the collapse. 

As explained on page 151, of the total currency of 
2,700 millions extant outside the Treasury in 1907, over 
one billion was tied up by the banks for reserve purposes ; 
allowing for this, the two kinds of money compared as 
follows, in August, 1907: 

Currency in hand-to-hand circulation $1,700,000,000 

Business men's "money in bank" 9,600,000,000 

The fact that all of this bank money of over nine 
billions was redeemable in currency on demand em- 
phasized the gravity of this disproportion. When a some- 
what exceptional demand for redemption sprung up, in 
the shape of a run on a few New York banks, the pro- 
portionate scarcity of the currency disclosed itself in a 
sensational manner — the free funds of all of the New 
York banks combined, were readily absorbed and were 
found inadequate to meet this demand, so the banks were 
forced to stop redemption of the bank money 5 , and had 
to suspend cash payments. Thereupon the distrust of 
bank money became universal, spreading over the whole 
country and giving rise to a premium as high as 4 and 
5 per cent, on cash money as against bank money. Pres- 
ently the whole complicated system of domestic exchange 
and of credit became clogged. 



Prosperity in the United States. 165 

The further development of the panic and its gradual 
subsidence into a depression followed the usual course, 
well known to economists, so we need not go into the de- 
tails. 

THE SUBSEQUENT DEPRESSION. 

During the early stages of the panic the opinion 
seemed general that the depression to ensue would be 
intense but short-lived. At present (July, 1908) nine 
months have passed with little or no improvement. What 
prevents the recovery? 

In the course of this treatise I have repeatedly pointed 
out that the degree of prosperity bears a close relation 
to the extent of new constructions under way. While 
the progress of new constructions went on with great 
activity prior to the panic, it experienced a decided check 
when the disturbance set in — a fact painfully evidenced 
by the stagnation in the iron industry, the one pre- 
eminently concerned in new constructions. Owing to 
this check many of the Constructive Working Forces 7 
were thrown out of employment, and this, in turn, re- 
acted upon the working forces employed in the lines of 
production and trade (Multiplying Principle), causing 
considerable curtailment of income, of purchasing power 
and of general demand. In consequence of the falling 
off of this demand the incentive for undertaking new 
constructions disappeared, the productive capital already 
in existence (factories, railroads, etc.) proving more 
than sufficient to meet the reduced demand. As a result, 
that peculiar complication set in, common to all depres- 
sions: The entrepreneurs do not build because the people 
are backward in buying commodities; and the people 
cannot buy because the entrepreneurs do not build. 

Instead of the dearth of cash capital so noticeable 
before the panic, we now see a plentiful supply of funds 
in the money market, with apparently no use for them. 



166 Recent Ups and Downs of 

Only in one line of enterprise are cash funds still in de- 
mand; namely, in the railroad industry; not so much 
for immediate requirements, which seem to be fully met 
by existing facilities, as to provide for the needs of the 
future. According to the opinion of a leading railroad 
man these will call for a billion dollars annually for a 
number of years to come, the capital invested in rail- 
roads having increased but little in the last five or ten 
years, although the traffic has grown enormously. If the 
money market's idle funds were applied in this direc- 
tion, the revival of business would be much assisted. 
But a peculiar difficulty stands in the way, inasmuch as 
the railroads find it impossible to borrow at reasonable 
rates of interest, while, on the other hand, they are un- 
willing to issue long-term bonds at an excessive rate, 
such as they had to pay on the numerous temporary 
loans which they issued within the last two or> three 
years. Thus, the money market presents the paradox 
of a superfluity of idle cash funds looking for employ- 
ment without finding it, and, on the other hand, a great 
industry sorely in need of funds without being able to 
obtain them. Naturally, this state of affairs will not last 
much longer, and will come to an end as soon as investors 
realize that the world-wide strain for cash capital is re- 
laxing, and that the outlook promises continued ease in 
the money markets for years to come. 

While a revival of railway construction and improve- 
ment will do its share towards reviving business activ- 
ity, we have to reckon with several other factors that will 
operate in the contrary direction. Let us enumerate 
some of. them. 

FIE ST- — Wages and prices are expected to go lower, 
and while this expectation prevails, buyers are apt to 
hold aloof. 



Prosperity in the United States. 167 

SECOND. — The annual expansion of the volume of 
bank money which was checked in consequence of the 
recent panic,, is not likely to be resumed so long as the 
present abundant supply of idle cash funds continues. 
I have pointed out on page 161, how this expansion of the 
bank money has created an abnormal demand for labor 
and for working forces, just for the purpose of new con- 
structions. This abnormal demand naturally ceases with 
the stoppage of the further inflation of bank money. If 
the demand, so far as it went beyond the normal, for- 
merly absorbed say 3 per cent, of all working forces, this 
share of the working forces is now condemned to idle- 
ness. And owing to the stepping in of the Multiplying 
Principle this ^hare of 3 per cent, may easily be increased 
to 10 per cent, or more. 

THIRD. — The country's saving power has grown to 
a tremendous total per annum, especially on account of 
the vast fortunes that have been accumulating in indi- 
vidual hands. So long as savings and surplus earnings 
could find ready absorption in new constructions, i. e., 
in the Capitalistic Form of investment, well and good; 
but where this avenue of investment is largely closed, 
and where, in consequence, the savings must find an 
outlet in the harmful "Impairing Form" of investment 8 , 
there, the greater the saving power, the greater will be 
the harm done, and the longer will it take to re-establish 
the equilibrium between the annual savings and the 
demand for them, i. e., the demand in the line of Capital- 
istic investment. 

As against these three points which work in the wrong 
direction, we may hope that the many natural resources 
of the country, still unexploited, will, sooner or later, 
attract capital and enterprise, so that savings and sur- 
plus earnings can again find employment in their legiti- 



168 Recent Ups and Downs of 

mate sphere. This would assure the return of pros- 
perity; though hardly in the shape of that over-strained 
business activity which prevailed in the decade from 
1897 to 1907. 

WHAT OF THE FUTURE? 

When business does revive, the question may arise, 
shall we not again experience the same troubles which 
led to the collapse of 1907? Have we any assurance 
against their recurrence? 

Much was said in the years 1906 and 1907 about the 
danger threatening from the constant rise of wages and 
prices, which, if unchecked, would ultimately have to 
result in a collapse; and the argument was often heard 
that a set-back in business activity would .really be de- 
sirable in that it would counteract the doings of labor 
unions and trusts, on whom was placed the chief re- 
sponsibility in bringing about this rise. The setback has 
now taken place, and has indeed imposed a check upon 
that dangerous tendency. After a revival of business, 
however, labor unions and trusts will no doubt resume 
their activities, and their success will -depend largely 
upon the extent to which business revives. 

While their aggressions undoubtedly aroused much 
attention, and provoked a great deal of hostile agitation, 
designed to meet those aggressions, very little notice was 
taken of another equally important factor — the inflation 
of our money volume, which resulted from the enormous 
expansion of bank money 5 . As pointed out on page 161, 
this inflation not only made possible the constant rise of 
wages and prices, but harbored a distinct tendency of 
its own in the same direction, thus proving fully as 
harmful in its effects as the first-mentioned factor. To 
successfully combat the unhealthy depreciation of our 
country's money, evidenced by the rise of wages and 
prices, the agitation should have been directed not only 



Pros peril y in the United States. 169 

against the labor unions and trusts but fully as much 
against the fearful inflation of the bank money. Few- 
people, however, even recognized the existence of this 
factor. In fact, instead of devising means to restrain the 
inflation, most of the financial authorities unwittingly 
advocate additional facilites for expanding bank credits 
still more, inasmuch as they demand greater freedom in 
the issue of bank notes — a remedy which may be likened 
to giving liquor to an intoxicated man. 

To guard against the excessive expansion of bank 
money and bank credits two expedients seem appro- 
priate: first, all commercial banks (including the Trust 
Banks, so far as they create artificial money) should be 
held to keep a large gold reserve, say 25 per cent, of the 
amount of bank money 5 ; second, nothing should be done 
to artificially augment the amount of cash in actual cir- 
culation — so as not to make it too easy for the banks to 
increase their reserves, and therewith increase their loans 
and the volume of bank money. If they simply could 
print bank notes on the strength of their "assets," put- 
ting these notes in circulation, and for every million so 
issued withdraw a million of gold from circulation, to 
be used for reserve purposes, the inflation might go on 
worse than before. 

The proper method of dealing with an exceptional 
demand for cash funds and bank loans is the one every- 
where adopted in Europe: An advance of the rate of 
interest. This would check, temporarily at least, many 
security issues, such as could not afford to pay the ad- 
vanced rate, and thus reduce the demand on the money 
market. Most of the financial authorities in the United 
States, however, argue the other way, and hold it essen- 
tial to maintain a uniformly low rate of interest, even 
when the demand for cash funds should become brisk. 
To attain this end they propose the creation of an elastic 



170 Recent Ups and Downs of 

currency in the shape of bank notes, issuable at a low 
rate of taxation, the volume to expand or shrink accord- 
ing to the demands of the money market. They overlook 
the law of supply and demand. According to this law 
the natural sequence to an extraordinary demand should 
be : a rise of the interest rate. 

Where this does not take place, and where an excep- 
tional demand for cash funds is simply met by the manu- 
facture of cheap money, namely, by the printing of low- 
taxed bank notes, another inflation of bank money is 
likely to follow as soon as business revives. Inflation,' 
if once begun, harbors a certain tendency towards sus- 
taining itself — the more there is of it, the more is wanted, 
see page 163. 

True, the bank-note currency ought! to be elastic 
enough to prevent the interest rate from going so high 
that there would be danger of a collapse of the money 
market. As it were, the increase of its volume should go 
band in hand with the increase of the interest rate. For 
this purpose an "emergency currency" would answer, 
subjected to a high tax, say 6 per cent. Such a tax would 
allow the banks to issue emergency currency only when 
the market rate of interest rules considerably higher 
than 6 per cent., and the tax would drive the notes home, 
to be canceled, as soon as the interest rate would subside, 
i. e., as soon as the danger were over. (Also see page 
187.) 

By following the latter suggestion we would have the 
means at hand, not only for guarding against a renewed 
collapse of the money market, but also for guarding 
against a resumption of the inflation of bank money, 
and therewith, indeed, we would have the factor under 
control which proved most instrumental in bringing about 
the collapse of 1907, and which, if not restrained, may 



Prosperity in the United States. 171 

prove equally dangerous in the future, after the revival 
of business. Of the three disturbing elements considered 
in the foregoing pages — labor unions, trusts, and infla- 
tion — the latter seems about the only one which is amen- 
able to our control, all efforts to check the other two 
having so far proved futile. But by checking the one 
we will, in an indirect way, attain the means for exercis- 
ing at least a partial check on the other two. It would 
hamper labor unions and trusts in two directions. In 
the first place, the general demand would become smaller 
because the factor now unduly swelling it, as pointed 
out on page 161, would disappear; in the second place, if 
labor unions and trusts should try, in spite of the smaller 
demand, to materially raise wages and prices, they would 
cause a comparative scarcity of money, and this of itself 
would tend to counteract such a rise. 

Continuous inflation of the bank money will natural- 
ly lead to a collapse. Most of our financial authorities 
are unable to see that the collapse of 1907 was due to 
that cause. But another collapse may follow if after 
revival of business the inflation should be resumed in 
that reckless manner as before. 

IN CONCLUSION. 

In Chapters 1 to 6 I have established the theory that 
depressions are due to Impair Savings. In the present 
Chapter I have shown that the disturbances of 1893 and 
1907 were brought about by causes of quite a different 
nature; the one of 1893 being distinctly traceable to the 
unhealthy condition of our foreign trade ; the one of 1907 
having its origin in monetary conditions. The present 
chapter, therefore, may seem to contradict the previous 
ones. But the apparent conflict will disappear when con- 
sidering the point elucidated in Chapter 1: that, though 
Impair Savings always form the ruling and sustaining 



172 Recent U ps and Donns of 

element of a depression after it once has set in, they 
mar not constitute the factor which primarily caused the 
economic disturbance and ushered in the depression. An 
economic disturbance may be brought about whenever 
any one of the various factors essential for prosperity 
(see Chapter 7) is lacking; and a depression always ac- 
companies the disturbance; but it takes Impair Savings 
to give continuity to the depression after the cause of the 
disturbance has ceased to operate. 

Such is the case with our present situation (1908). 
The collapse which took place in the fall of 1907 can 
clearly be traced to the inflation of bank money and the 
concurrent strain on the money market. At present, 
however, these two adverse factors are no longer opera- 
tive. So the causes which ushered in the depression have 
disappeared. As nevertheless the depression continues, 
a new factor must have stepped in to which that con- 
tinuance is due. This new factor arose from a change 
in the character of the saving process. It consists of 
Impair Savings. Could this factor be removed, the de- 
pression would speedily come to an end. 

In 1893 the situation was somewhat different, inas- 
much as the unhealthy condition of our foreign trade, 
the cause which then inaugurated the panic, did not pass 
away after the latter had subsided. Owing to the un- 
favorable trade balance our gold supply had heavily been 
drawn upon previous to 1893 (see page 141), thus weak- 
ening our monetary position and making it easy for that 
clique of reckless financiers to engineer the raid on the 
stock market which presently developed into a panic. 
This unhealthy condition of the foreign trade extended 
over the whole period of the depression, and the latter 
was not relieved until, in 1897, our foreign trade took a 
decided turn for the better. So it may seem that the de- 
pression was entirely a matter of foreign trade, and in 



Prosperity in the United States. 173 

no way due to Impair Savings. As a matter of fact, how- 
ever, the latter fully played their part. They set in as 
soon as the disturbance set in. Without them the panic 
never could have attained the dimensions which it 
reached ; and without them the subsequent prolonged 
depression would not have existed — there would have 
been more buying of commodities, and less unemploy- 
ment, and more of an equilibrium between demand and 
supply. 

From whatever standpoint we approach the subject 
of depressions, we will find that as soon as we probe the 
matter to ' the bottom we inevitably encounter Impair 
Savings as their underlying cause. Other factors, such 
as described in this chapter, may engender more or less 
economic disturbance; but only when Impair Savings 
join (as they mostly do) will the disturbance assume 
that chronic, paralyzing form which we call depression. 

On page 132 I have spoken of an antidote for Impair 
Savings, namely, enterprise. This is such a prominent 
factor in the United States, and the country offers so 
many opportunities allowing it to become effective, that 
the antidote ought to seem powerful enough to make 
the very formation of Impair Savings impossible. Yet 
at present, 1908, we have the fact before us that enter- 
prise is largely paralyzed, and but little is being done to 
exploit our natural resources, so the antidote against 
Impair Savings has become ineffective. The latter have 
gained the upper hand. They destroy the equilibrium 
between demand and supply, and thus engender de- 
pression, at a time when all the elements of prosperity 
seem to be at hand. 

******** 

Have we any positive proof that Impair Savings are 
really going on during the present depression? I think 
we have — despite the fact that a large share of our sav- 



174 Recent Ups and Downs of Prosperity in the U. S. 

ing power is constantly being absorbed by the issue of 
new securities, especially in the railroad line, to an extent 
quite unusual for times of depression. The savings so 
absorbed are turned to good advantage, and on this 
account the depression of 1908 is far less severe than the 
one of 1S93. But not nearly all of the savings now 
made are thus absorbed for useful purposes; and the 
balance will create harm. Wherever we see people "run- 
ning behind" and getting poorer, owing to general mar- 
ket conditions and to the lack of employment, there we 
see the effect of Impair Savings, thus giving us positive 
proof that Impair Savings exist — see page 120. 



CHAPTER IX. 

SUMMARY OF THE FOREGOING. 

THE dual nature of the saving process, the radical 
change in its character under varying circum- 
stances — stimulating business at one time, and depress- 
ing it at another— has so far not received due recogni- 
tion on the part of economists. Practically only its 
bright side has been studied. The dark side, though 
often pointed out by authors of the present and of the 
past, has been largely argued away. So strong, indeed, 
is the sentiment of economists on this point, that where 
they find anyone who doubts the ultimate usefulness of 
the saving process, they will generally attribute such 
doubts to ignorance of one of the accepted axioms of 
economics. The sooner we discard the idea that so much 
saving means so much increase of the community's 
wealth, and the sooner we recognize that only a portion 
of the savings now made will benefit the commonwealth, 
the sooner will we be in a position to arrive at practical 
measures for doing away with depressions of trade. 

A BRIEF REVIEW. 

Let us recapitulate' the leading points of the Depres- 
sion theory developed in this book. 

"Lack of demand" is the fundamental feature of 
all depressions. If we can learn the cause of the one, we 
know the cause of the other. 

In the course of ordinary business the producer and 
seller of a dollar's worth of commodities will subsequent- 
ly buy a dollar's worth of other commodities, either he or 
his family; so the supply should equal the demand, and 
there should be no "lack of demand." 



176 Summary of the Foregoing. 

A complication arises by the interference of the sav- 
ing 1 process. The saver, though selling his own services 
or goods, does not care to buy those of others. And if 
he omits to do so, there must be a shortage of the de- 
mand. All economists agree in the opinion that the initial 
stage of the saving process tends to curtail the demand. 

So long as the saver (or somebody else for him) 
promptly invests his savings or surplus earnings in the 
"Capitalistic" manner, i. e., in new constructions or in 
the creation of new wealth, that shortage of demand is 
fully compensated for. He will call for working forces 6 
to engage in such new constructions, and his savings will 
be turned into income for these working forces. Then 
the inherent tendency of the saving process, to create a 
lack of demand, is fully counteracted. But if not so 
counteracted, 'that inherent tendency will become effec- 
tive despite the fact that the savings become invested, 
and a shortage of the demand will follow— a shortage en- 
tirely due to the saving process. The latter then changes 
from the "Capitalistic" to the "Impairing" form. It 
serves no longer towards increasing the aggregate wealth 
of the country, but leads to a mere shifting of wealth, 
making the savers richer, others poorer. 

This process has been demonstrated on page 40 by 
means of my "Basic Calculation." If the savers save up 
two billions in the course of a year, and become richer 
by that much, while the country's wealth or property 
increases only one billion, then they must have extracted 
the other billion from the non-savers, the latter becom- 
ing poorer to that extent. If the non-savers owned fifty 
billions at the beginning of the year, they will own only 
forty-nine billions at the end of it. So it was partly at 
their expense that the savers became richer. Without 
the saving process, this impoverishment of the non-sav- 
ers would not have taken place. 



Summary of the Foregoing. 177 

How is this impoverishment effected? By lack of 
employment. 

Suppose that in a year of prosperity, the aggregate 
savings amount to three billions, all of this being invest- 
ed in new constructions, and becoming income for the 
Constructive Working Forces. 7 If that three billions of 
new constructions dwindles down, in a year of depres- 
sion, to one billion, there will be two billion dollars' 
worth of "Constructive" Forces thrown out of employ- 
ment. 

Now let us further suppose that the individuals repre- 
senting the unemployed part of the Constructive Forces 
had property which they could sell or borrow on, and 
that, by doing so, they were procuring the means for con- 
tinuing their style of living and their expenditures pre- 
cisely in the manner they were used to when fully em- 
ployed; what character would the depression assume 
under such conditions? 

The depression would then be confined strictly to 
the Constructive Forces, to the trades usually engaged in 
new constructions, and would in no way extend to the 
"Commodity" Forces 7 . The latter, representing prob- 
ably 85 per cent, of the whole, would find just as much 
employment and just as much demand for their products 
as before, our assumption being that the Constructive 
Forces expend fully as much for commodities as form- 
erly. Under such circumstances there would be no diffi- 
culty to recognize the true character of the change in 
the saving process. Instead of leading to an augmenta- 
tion of the country's wealth in the shape of new con- 
structions, it would merely lead to a "Change of Posses- 
sion" of such property as already exists, the Constructive 
Forces losing property (or becoming indebted) to the 
extent of two billions a year, and the savers becoming 
richer by that much. 



178 Summary of the Foregoing. 

In the foregoing we assumed that the Constructive 
Forces, though not earning anything, would in no way 
restrict their purchases of commodities. In reality, how- 
ever, they will economize, and very much so, even if 
owning property on which they could realize. They may 
reduce their consumption to one-quarter of what it was. 
In that case they would lessen their demand for commodi- 
ties by a billion and a half. This lessening of the demand 
would entail a lessening of the production of commod- 
ities. This, again, would entail a corresponding unem- 
ployment among the Commodity Forces 7 , and bring the 
total loss of income, due to unemployment, to three bil- 
lions and a half. Nor will the loss stop there. Owing to 
the well-known process of action and reaction, unemploy- 
ment will spread from one trade to another, multiply, as 
it were (Multiplying Principle) and bring up the loss 
of income to an amount much larger than the whole 
amount of the savings. The more the people try to meet 
the loss of income by economy and privation, and the 
more they cut down their expenditures, the more will the 
demand for commodities be lessened and the severer 
will be the stagnation in trade. 

The Change of Possession (of property already exist- 
ing) is inseparable from this, the Impairing Form of the 
saving process. The Change of Possession is enforced 
by means of unemployment and by the loss of income re- 
sulting therefrom. Among the unemployed (or only 
partly employed) there are many who own property. 
They need money to pay their living expenses. So they 
must either borrow or realize on what they own Un- 
employment, therefore, and loss of income, form the whip 
which forces people to part with their property, there- 
with giving the savers an opportunity to invest their 
savings either in buying the property or in lending 
money on it. For every million of Impair Savings a mil- 



Summary of the Foregoing. 179 

lion of properties or securities must go into the possession 
of the savers, otherwise the savings would accumulate in 
the shape of hoards, and matters would hecome still 
worse. 

After the million has been thus invested, and the 
money been expended by the receivers, for commodities, 
the money returns into the channels of production and 
trade, and the chain of mischief caused by the saving of 
that individual million comes to an end. 

Ordinarily each individual member of the working 
forces is not only a producer, but also a consumer. Under 
the Impairing Form of saving or investing, however, 
demand and supply are no longer united in the same 
individual. Two individuals will no longer furnish two 
supplies and two demands, but only one supply and one 
demand ; i. e., for working forces; the saver producing 
Avithout consuming, and the consumer finding himself 
without the opportunity to produce, his services being 
"left uncalled for. 

Our economists have been arguing that inasmuch as 
all savings funds are finally turned into goods or services, 
thereby giving employment to working forces, the sav- 
ing process can not give rise to a shortage of the demaiid, 
even at times of depression. They overlook the fact that 
before the saving funds are expended for goods or ser- 
vices, unemployment stands in between — unemployment 
caused directly by the saving activity, when assuming 
its Impairing Form. 

I repeat, the saving activity always harbors the in- 
herent tendency of causing unemployment and curtailing 
the demand. This tendency is fully counteracted when- 
ever the savings are invested in new constructions or in 
the creation of additional wealth; but if not so counter- 
acter, that tendency will become operative. The great- 



180 Summitry of the Foregoing. 

er the amount of savings, and the smaller the proport ion 
which finds investment in new constructions, the greater 
will be the harm inflicted upon the community. The ht/rm 
so inflicted, invariably aggravated by the stepping in of 
the Multiplying Principle, will fully account for all the 
phenomena observed at a time of depression. 

We cannot do away with depressions before we find 
means to restrict or eliminate the Impairing Form of the 
saving process. 

THE THREE DEGREES OF BUSINESS ACTIVITY. 

From the foregoing it follows that prosperity will be 
high or low, according to the character of the saving 
activity. In Chapter 8, however, a further factor has 
been referred to, namely, the inflation of the money 
volume, which likewise plays an important part in affect- 
ing the course of business. Accordingly, we may dis- 
tinguish three degrees of business prosperity, as follows: 

1.— HEALTHY BUSINESS.— Best results are at- 
tained when the annual savings 1 available for investment 
are neither larger nor smaller than the amount of cash 
capital required for new constructions 3 — always presum- 
ing, of course, that the other factors essential for pros- 
perity (as enumerated in Chapter 7) are at hand. Then 
the saving process will not disturb the equilibrium be- 
tween supply and demand, and there will be no lack of 
the latter. The aggregate of savings should not be too 
large, hardly over 10 or 12 per cent, of the people's ag- 
gregate income, in a new, progressive country; 5 per 
cent, in an old well developed country. In the latter case 
95 per cent, of all working forces would be absorbed 
for purposes of production and distribution of commod- 
ities, and only 5 per cent, for new constructions. Then, 
if a lull in new constructions should take place, and part 



Summary of the Foregoing. 181 

of the Constructive Forces 7 should be thrown out of em- 
ployment, this would represent only a fraction of 5 per 
cent, of the aggregate of all working forces, so the reac- 
tion on the remaining 95 per cent, and on business in 
general would be but slight. 

Such a healthy state of business is favored by a 
reasonably even distribution of wealth, such as obtains 
in France. The concentration of wealth in a few hands 
is not desirable, especially in old countries. It will un- 
duly promote the saving process (see page 66). And 
though this may do no harm in a new country, like the 
United States, so long as wealth and population are rapid- 
ly expanding and all savings readily absorbed in new 
constructions, it will do harm when a lull in new con- 
structions sets in. Then savings become Impair Savings; 
and the greater their volume, the more will the recovery 
of business be impeded. 

2.— OVER-STRAINED BUSINESS. — This takes 
place whenever the supply of cash capital does not come 
from the saving process alone, but is largely supple- 
mented by the creation of artificial money, by an infla- 
tion either of bank money 5 or of printed currency; 
especially so of the latter. In the United States it was 
principally the undue expansion of bank money (see page 
161) which, in conjunction with the unusual extent of 
new constructions, imparted that over-strained character 
to business which marked the years preceding 1908. 
These new constructions caused more demand for work- 
ing forces than could be had. Besides, they distorted 
the proportion between "Constructive" and "Commo- 
dity" 7 Working Forces, the former reaching a figure 
probably as high as 15 per cent, of the total, or more. 
When, in 1908, a depression followed the panic of 1907, 
there was still a fair demand for new constructions, but 
by far insufficient to absorb all of the Constructive Work- 



182 Summary of the Foregoing. 

ing Forces then in existence. And the surplus could not 
find employment among the Commodity Forces. These, 
constituting 85 per cent, of the aggregate, were fully 
capable of supplying the consumptibles needed for all, 
even at the time of the great demand during the boom, 
and are certainly so at present (1908), with the demand 
largely reduced. 

Over-strained business, though imparting the impres- 
sion of excessive prosperity so long as it lasts, is bound 
to come to an end sooner or later. It rests upon infla- 
tion, and this can not go on forever. When the process 
of inflation ceases, we find many unhealthy conditions 
to have developed: a superabundance of Constructive 
Forces, with no work for the greater part of them; wages 
unduly advanced, and therewith the general level of 
prices; foreign trade in a precarious condition, the home 
market having become a better one for foreigners to sell 
in and a poorer one to buy in ; credits strained beyond 
the limit of safety; a growth of the desire for big profits 
at the expense of conservative business methods. 

3. — DULL BUSINESS. — The cause of this has been 
so fully considered in the course of this treatise that it 
seems only necessary to say: If it is not due to the ab- 
sence of any one of the known essentials to prosperity, 
enumerated in Chapter 7, it is due to Impair Savings. 

it ^fr ^t Ht jfe jfr- jfr jfc 

The conditions set forth under Point 1 are conducive 
not only to a healthy state of business, but they also 
favor stability. Those set forth under Point 2 tend 
toward extremes— -too much business at one time, too 
little at another. 

At "normal" times business ought to be of the char- 
acter stated under Point 1; but Ave generally find much 
of a co-admixture of the conditions embraced in Points 



Summary of the 1 ore going. 183 

2 and 3- on the one hand there is more or less of Impair 
Savings, as evidenced by the fact that the demand con- 
stantly falls short of the supply; on the other, we find a 
gradual but steady inflation going on, as evidenced by 
the constant swelling of the volume of circulating money, 
and much more so of bank money. 5 The latter especially 
has, in the last decade, expanded to an extent which 
seems to bring us near the limit. It has stimulated busi- 
ness while it went on; but in future we may have to do 
without this unhealthy stimulant, and if so, we may not 
again experience such a period of excessive boom as we 
did of late. 

Let it be well understood, the phenomenal business 
activity witnessed in the United States, between 1897 
and 1907, was largely caused by the phenomenal inflation 
of the bank money. While all economists admit the stim- 
ulating effect of an inflation of the currency, and while 
but few of them will attribute a similar (though weaker) 
influence to the inflation of bank money, such influence 
certainly existed, as explained on page 161. Also in 
Germany has the inflation of the bank money played its 
part towards creating the unusual business activity wit- 
nessed there in recent years and the aftermath will be 
severe, considering that the country has not (like the 
United States) many opportunities left for the profitable 
investment of savings 1 and that the latter, therefore, will 
largely assume the character of Impair Savings, far more 
so than with us. In either case the position as to foreign 
trade and as to the '"balance of payments" has become 
rather weak, America exporting gold, and Germany 
struggling to retain her gold supply by means of a high 
bank rate. If the inflation-stimulant should spread to 
other countries, already weak in foreign trade, like Russia 
or Austria, it probably will not develop very much before 
the growing "balance of payments" inaugurates a drain 



184 Summary of the Foregoing. 

on the gold supply, therewith deranging the country's 
financial condition and making an end to the inflation 
business. 

ECONOMIC FALLACIES. 

There is no science which contains so many contradic- 
tions and conflicting views as may be found in economics. 
Hardly two experts will everywhere agree on funda- 
mental points and on their bearing. To a large extent 
this dissension of views is due to the fact that the origin 
of one of the most important phenomena, namely, de- 
pression and slack business, has so far remained unknown 
— in consequence of which every economist, who did his 
own thinking, formulated a theory of his own to account 
for those phenomena, and in doing so had to resort to 
more or less "adjustment" in order to make the facts 
agree with his theory. The true cause of depression 
known, we will have a guide for testing many of the 
conflicting opinions as to their correctness, and a num- 
ber of views now current will have to be abandoned or 
modified. In the following I enumerate some of these : 

1. — ''''Extravagance is one of the chief causes of our 
present depression and of depressions in general. — 
Had we had less extravagance, or, what comes to the 
same thing, more saving, at the time of the «boom, less of 
the people's income would have been spent for commo- 
dities, and more of it for new constructions. Then the 
proportion between "Constructive" and "Commodity" 
Working Forces 7 , instead of being as 15 to 85, might have 
been as 20 to 80. In consequence, new constructions 
would have proceeded at a still faster rate, and we would 
have arrived all the sooner at a superfluity of these, i. e., 
at a superfluity of productive capital. Then new con- 
structions would come to a halt, the boom would cease, 
and depression would set in. The depression would not 



Summary of the Foregoing. 185 



only set in so much the sooner, but would be more severe, 
with consumption restricted (as premised) and the num- 
ber of unemployed Constructive Forces much larger than 
at present. 

In a healthy development an increase of consumption 
should go hand in hand with the increase of productive 
capital. To restrict the former would mean a restriction 
of the demand. The lack of demand, however, is just 
what causes the depression. 

2.— Excessive extravagance during the boom was 
evidenced by the excessive demand for consump- 
tibles, which was almost greater than the produc- 
tive power of the country. Therefore that scarcity 
of labor. Without this excessive demand, that 
mad rush for extending the productive capital 
in order to meet the great demand would not 
have developed. — No doubt the scarcity of labor indi- 
cated an unusual demand for the products of labor, i. e., 
for consumptibles. But I have shown, on page 161, that 
this great demand for labor was principally caused by 
the inflation of bank money. 5 A billion of additional 
bank money means a billion of additional demand for 
working forces. If the country's working forces repre- 
sent a productive power of 20 billions per annum, and by 
means of inflation the demand is increased to 21 billions 
— not only the demand, but also the income and the buy- 
ing power — then, indeed, the demand must seem unduly 
large when compared with the productive power. That 
excessive demand, however, as well as the seeming ex- 
travagance deduced therefrom, must disappear as soon 
as the inflation comes to a halt. The panic, therefore, 
was not caused by extravagance, but by the inflation of 
the bank money. 

3. — As we did not economize sufficiently during the 
boom, we must do so now; the greater the economy, the 



186 Summary of the Foregoing. 

sooner shall we have the funds necessary for another era 
of new constructions. — Do we really need more of new 
constructions at present and more economy to obtain the 
funds for erecting: them, or do we need the reverse — less 
economy and move buying of consumptibles, so as to pro- 
vide employment for the productive capital already ex- 
isting? I believe we need the latter. 

Though we often hear the assertion that we did not 
save enough and did not economize sufficiently during 
the boom, the fact remains that, despite the seeming ex- 
travagance, the country's aggregate savings were enor- 
mous — otherwise we would not have had the funds where- 
with to create all those new constructions which sprung 
up at that time. 

4 —The panic was due to over-production. — Previous 
to the panic the question was quite often raised as to 
whether over-production was really going on, and the 
question has as often been denied by all unbiased ob- 
servers. Production did not run ahead of the demand 
but merely followed it. For the cause of the great de- 
mand 1 refer to Point 2. 

5.— Panics are due to a lack of equilibrium in produc- 
tion. -This easy to say, but hard to prove. I have dis- 
cussed this topic on page 70. As a rule, production will 
follow the demand, and if so, how can there be a lack of 
equilibrium in production? 

6.— Panics are caused by too rapidly ' 'discounting" 
the future through placing of capital (cash capital) in 
fixed investments. So long as the funds used for fixed 
investments, i. e., for new constructions, like railroads, 
factories, etc., come from the saving process, there is no 
harm. And no harm if the funds are borrowed, provided 
the lender derives them, directly or indirectly, from the 
saving process. But the danger commences (even for 



Summary of the Foregoing. 187 

solid undertakings) if the funds are derived from the in- 
flation process — say, by extending the Issue of bank 
money. 5 Inflation has tbat peculiar quality of being self- 
sustaining; the more there is of it, the more is needed 
(see page 163). And as inflation cannot be carried on 
indefinitely, a collapse is bound to ensue. 

7. — The panic was due, in part at least, to the 
inelasticity of our currency volume, which fails 
to respond to the varying demands of business. 
To remedy this, bank notes should be freely 
issued or retired according to the require- 
ments of the money market. — If, before the panic, 
our currency had been given the right kind of elasticity, 
the panic would most likely have been prevented — say, 
by allowing the issue of an emergency currency, subject 
to a hig-h tax. But suppose that the tax had been low, 
and the notes issuable ad libitum, even at the time of the 
boom, what would have been the consequence? In face 
of the insatiable demand for cash funds which ruled in 
1906 and 1907, we would have had an inflation of the cur- 
rency (see page 169), on top of the inflation of the bank 
money. Then the collapse inevitably following excessive 
inflation might have led to a similar distrust of bank notes 
as did attach to the bank money, thus multiplying 
disaster. 

Inflation for the sake of temporary needs, say, for 
moving the crops, does no harm, if followed by a corre- 
sponding contraction. Inflation, however, if resorted to 
in Order to provide the funds for permanent investment, 
is objectionable. It over-stimulates the general demand 
while going on, but. creates a shortage of demand when 
coming to a halt. (See Point 2.) 

8. — Wliile at a time of great prosperity sav- 
ings funds are absorbed almost exclusively in 
new constructions, an occasional setback be- 



188 Summary of the Foregoing. 

comes necessary to provide for the money 
markets ''''other requirements.'''' — These "other 
requirements" are a myth. In Chapter 2 I have dis- 
cussed all imaginable possibilities as to what they might 
consist of, and have shown that none of them really 
absorb the country's savings funds. 

9. — No harm can attach to the saving process so long 
as the savings funds find ready employment. Even at 
times of depression they accumulate in the money mar- 
ket to a limited extent only, showing that they are ab- 
sorbed. And as business men when absorbing them will 
apply them to some useful purpose, the saving process 
must always lead to a useful end. — No argument has 
occasioned greater confusion in the economic world than 
this one, highly plausible as it appears. As a matter of 
fact the seemingly "useful end" often consists of noth- 
ing but Impair Investments*— a form of investment which 
so far has remained unknown to our economists. Once 
it is known, Argument 9 becomes untenable. - 

10. — Savings funds, if failing to find useful employ- 
ment at home, ivould simply go abroad. — Except to a 
very limited extent investments abroad can not be ef- 
fected unless the state of the country's foreign trade 
allows of it, the foreign investments being circumscribed 
by the extent to which the trade balance (see page 135) 
may be favorable — a subject fully elaborated on page 
134. 

11. — Though the saving process may cause a 
shortage of demand at one time, say, during 
a depression, the shortage will be compen- 
sated for when the savings funds subse- 
quently come to be invested. — This view, though run- 
ning counter to the one discussed under Point 9. is often 
heard. Both views are wrong. If working forces 6 are 



Summary of the Foregoing, 189 

thrown out of employment, owing- to lack of demand 
caused by the saving process, and are kept idle for any 
length' of time, the productive power thus annihilated is 
lost forever, and is not compensated for by the fact that 
those working forces may find employment again later on. 

12. — Trade reactions are necessary evils, bound to 
recur in rotation.- -If we should ever be able to guard 
against Impair Savings, we would have the means of do- 
ing away with those extended periods of depression, and 
the belief in the inherent necessity of their recurrence 
would prove fallacious. 

In the foregoing I have discussed some of the views 
now current on extravagance, economy, saving and some 
other factors in connection with their bearing on our 
economic status. Most of our economists believe that the 
more we save (without hoarding) the better we are pro- 
tected against depressions and disturbances. In contrast 
with this belief I maintain that if at times of depression 
or of slackening business we could check the saving pro- 
cess, and could enforce more buying and less accumula- 
tion on the part of the wealthy, we therewith could check 
the depression. On the whole our saving power is too 
large. In busy seasons too much is accumulated and in- 
vested in new constructions, the latter fact again increas- 
ing the business activity. If at such times we had more 
consumption and less saving, and consequently less of 
new constructions, the cycle of prosperity would last 
longer. We would not so quickly arrive at a period of 
superfluity of productive capital, with a consequent lull 
in new constructions and a change of the saving process 
from the Capitalistic to the Impairing Form. 

If we could find a practicable method for controlling 
and eventually limiting the saving activity, things would 



190 Summary of the Foregoing. 

soon shape themselves so as to conform to that healthy- 
state of business described on page 180. The demand 
for working forces will then be as large as the supply; 
there will be employment for practically all of them; 
the feverish activity during a boom and the subsequent 
period of stagnation will be supplanted by a uniformly 
brisk state ,of business ; the shifting and changing about 
of working forces 6 will give way to a greater stability of 
employment; of the working forces, fewer would be en- 
gaged in new constructions and more in the production 
of commodities, which would mean a larger allotment of 
the fruits of labor to each individual, i. e., a higher 
degree of prosperity. 

Temporary economic disturbances may not be en- 
tirely eliminated, but protracted periods of depression 
would become impossible. 



ONCE MORE, THE "NEGLECTED POINT." 

It was not my intention when writing this book to 
present a complete treatise on panics and depressions, 
following up their origin, development and gradual 
abatement. All that I have aimed at has been to bring 
out the "Neglected Point," and I have branched out on 
other subjects (for instance, the various depression 
theories) no further than necessary to elucidate my own 
views and defend my position. The object of this "book 
is to reveal the dual nature of the saving process, its 
beneficent as well as its impairing form, and to bring out 
the main features of the latter — notably that strange^ 
duplex action which, on the one hand, places investment- 
seeking cash funds in the possession of the savers, while 
on the other it creates market conditions which open up 
opportunities for the investment of those funds — this at 



Summary of the Foregoing,. 191 

a time when the legitimate field of investment (new con- 
structions, etc.) narrows down. 

My investigations do not verify the universal belief 
that in the end the saving activity will always benefit 
the commonwealth as well as the individual saver. I 
have shown that it is far from being an unmixed blessing. 
It may harm as well as benefit the community. It will 
either stimulate business activity or depress it; either en- 
liven the demand, or diminish it. If it ceases to be useful 
it at once becomes harmful. In its effects it is either con- 
structive or destructive, never neutral. 



Before we can find the proper remedy for depressions, 
we must know their cause. I have stated, in this book, 
what I believe to be their true cause. 

As a rule, the reader will not consider a depression 
theory complete unless it gives suggestions as to the 
remedy; such, however, I am not prepared to offer. But 
I dare say, if my depression theory should be accepted as 
the correct one, a remedy will be discovered. And even 
if a sweeping remedy for Impair Savings could not be 
found, the knowledge of their existence and of the harm 
they entail upon us, would go far in guiding us to shape 
our economic policy, wherever legislative measures have 
to be taken that bear upon the subject. 



EXPLANATORY NOTES. 

1st. — In this treatise the term '"savings" is meant to 
cover all surplus earnings : those of the millionaire as well 
as those of the working man. 

2nd. — The term "capital'' should always be under- 
stood in the economic sense, meaning productive capital, 
or capital goods, like factories, houses, railroads, ships, 
etc. In common usage the term is often applied to cash 
funds, such as are loanable or available for investment. 
Wherever the latter kind of capital is referred to in this 
book, it will be called "cash capital." 

3rd. — The terms "new constructions," "new wealth," 
or "additional wealth," are largely identical with "new 
productive capital," but they also include new acquisi- 
tions of what may be termed "unproductive capital," 
such as houses occupied by the owners, hospitals, schools, 
bridges, streets, pleasure boats and vehicles, and many 
kinds of constructions not intended for business purposes, 
in fact, all property left in the possession of the com- 
munity at the end of the year in addition to what it 
possessed at the beginning of the year. 

4th. — The term "money market" should be under- 
stood to include not only loanable funds, but all funds 
available for investment in new enterprises. It does not 
include, however, the liquid capital employed by business 
men in carrying on their regular business; such funds 
are not available for new enterprises, nor for loaning 
purposes. 

5 t h. — By "Bank Money" is meant the deposits of 
business men and others in commercial banks, subject to 
check; their "money in bank." It does not include de- 



Explanatory Notes. 193 



posits in savings banks. In the United States it would in- 
clude deposits in National banks, State banks, and most 
of those held by Trust banks. 

6th. — The term "working forces" should be under- 
stood to mean only individuals, such as are engaged, di- 
rectly or indirectly, in the production and distribution of 
commodities or in the creation of any kind of wealth; 
workingmen as well as men of other vocations — manufac- 
lurers, farmers, merchants, transporters, capitalists, etc. 
In fact, all men who derive an income from their being 
connected with a particular trade should be considered 
as constituting the working forces engaged in such trade 
to the extent of that income; even the capitalist who 
merely draws interest on the funds which he advances 
to participants in that trade. 

7th. — The term "Constructive Working Forces" re- 
fers to such individuals as are engaged, directly or in- 
directly, in new constructions or in the creation of addi- 
tional wealth; 3 whereas those who are engaged in the 
production of commodities intended for consumption are 
referred to as "Commodity Working Forces." This dis- 
tinction does not exclude the possibility that one and the 
same man, for instance a dealer, may partly belong in 
the one class and partly in the other. 

8th. — The term "Impairing Form of Investment" has 
been chosen to indicate that an impairment of the com- 
munity's welfare is intimately connected with that form 
of investment. But it should be understood that the 
act of investing, as such, is not the cause of the impair- 
ment; on the contrary, the act of investing is always 
beneficial to the welfare of the community. The impair- 
ment comes from some other cause, as explained in Chap- 
ter 5, not from the investment. 

9th. — The term "impoverishment" should not be un- 



194 Explanatory Notes. 



derstood to mean reduction to poverty, but merely "be- 
coming poorer." A man may become impoverished by 
.$1000 and still be a rich man. 

10th. — The term "alienation of property" should be 
understood in a broad sense and to include not only the 
selling of property in cases of urgent need, but also the 
borrowing on it, say, in the shape of a mortgage or other 
pledge; and the term "borrowing" ("borrower") should 
also be understood to cover both, borrowing as well as 
selling. A very familiar instance where a man borrows 
on his property, or even on mere credit, is furnished by 
the "running behind" of a business man who does not 
earn his expenses in times of depression and whose bal- 
ance-sheet at the end of the year shows a loss where it 
used to show a surplus. Such loss reduces his wealth; 
and unless he allows his plant or his stock to run down, 
others will gain what he loses. If at the end of the year 
he has less money on hand, others have so much more; if 
his outstanding accounts have become smaller, the com- 
munity owes him so much less and has become relatively 
richer ; if he has more notes outstanding, those who hold 
the notes have acquired a kind of lien on his property 
(which amounts to an alienation on his part) and at the 
same time have found investment for their funds when 
buying those notes. Just so if the State's income runs be- 
hind in years of general depression, and if bonds are 
issued to make up for the deficit ; this gives the savers an 
opportunity for investing their surplus earnings; but to 
the same extent the community becomes indebted; i. e., 
poorer. 



\ <«,: 



LIBRARY OF CONGRESS 



013 822 789 3 " 



■ : 









wamMifr, 



mmzzm 



1 









wmmzmm 



WKM 






■Hi 



i 









